Factoring means than an enterprise will continuously sell its receivables resulting from the sale of goods or services to a factoring company. Thereby, the enterprise receives liquidity immediately from its accounts receivables. The factoring company checks the credit rating of the enterprise’s customers before and during the factoring relationship. It also takes on the default risk within the range of an agreed limit.
Therefore, this form of financing grows almost automatically and in parallel with any increases the enterprise’s turnover may experience, which is why factoring is sometimes also referred to as a form of financing congruent to turnover. However, factoring is much more than only a form of business financing: On top of transforming mere receivables into liquidity, factoring also offers extensive default protection as well as receivables management to the factoring client, including debt collection services. Due to being immediately provided with liquidity, the factoring client can gain additional revenues such as cash discounts and special conditions. Through being offered credit protection as well as up-to-date credit ratings about their customers (the debtors) by factoring companies, factoring clients can make their distribution and sales channels safer. Especially for SMEs, outsourcing the management of receivables can lighten the administrative load. The sale of receivables shrinks the balance sheet and improves the accounting ratio, which is an ever-growing advantage in times of “Basel III”. It is therefore not surprising that factoring is already a widely spread form of business financing, used on a daily basis in more than 30 industries. Trade/trade negotiation, manufacturing of metal products and machines, the nutrition sector, the manufacturing of chemical products and other processing trades, vehicle construction, manufacturing of electronics and electronic components as well as the paper and printing industry are currently among the most important factoring clients. Factoring receivables from the healthcare and building sector has also become increasingly important over the last few years. The broad range of SMEs in particular still shows considerable potential for the use of factoring as an alternative and attractive form of business financing.
Further links
Advantages of factoring
Factoring from A to Z
Questions on factoring (video in German)
