What is factoring?

What is factoring? - Definition


Factoring is a common business practice in the financing of companies. It usually takes place within a framework contract. The core of factoring is the regular sale of receivables. Here a company sells a receivable, i.e. an outstanding account, against a customer to another company. This is called a factor, factoring company or factoring institute. The receivable then belongs to the factoring company, which then asserts it to the customer. Since the activities and competencies of collection agencies overlap, factoring and collection services are often offered by one provider.

 

What is factoring? - Components


In addition to the sale of receivables, also known as  assignment of receivables, factoring comprises other components. An important criterion is the del credere. This is the factoring company acquiring the guarantee for the solvency of a debtor. If the customer does not pay in the end, this risk is carried by the factor.

Pre-financing of receivables is also part of factoring. If a company has a justified receivable against a customer, it often has to wait some time for the due payment. This waiting period falls away with the framework of a factoring contract. The factor pre-finances the receivable for the customer. So depending on the contract, the company will receive a large part of the money due to them immediately, rather than after 30 days or longer. Pre-financing rates usually lie between 80 and 90%. The company receives the balance of the receivable when the customer or debtor has paid.

The third component of standard factoring is the acquisition of debtor management. This includes accounts receivable, regular credit assessment of customers, dunning and debt collection. The factoring company will undertake these services for its customers. For example, the seller no longer sends dunnings. The factor handles these processes for him. This is also where the activities and competencies of a collection agency overlap.

 

What is factoring? - the advantages


Companies of all sizes now use factoring as a means of financing. This increases their liquidity. The company immediately has more money available. Instead of waiting for payments of receivables, it immediately has the funds from an order. This has various positive effects. Increased liquidity improves the equity ratio, balance sheet and, in the long or medium term, the credit rating. If a company wants to apply for a loan, factoring will better their chances. Find out more about improving a credit rating at inkassoportal.de. Factoring also protects against bad debts. If the due receivable cannot be collected, because the customer is insolvent for example, the factor beares the loss through del credere. Ultimately, companies can save on overheads by means of factoring contracts. Accounts receivable and dunning are the factor's responsibility. No personnel, time or resources need to be spent on these activities.

 

What is factoring? - the subforms


Some companies do not want to turn over certain areas, the sensitive dunning process for instance. Here in-house factoring is the solution.