30 days: the legal payment period which businesses must allow their customers for payment of bills. However, this period is frequently – in some branches and countries sometimes excessively – exceeded. The consequences for the creditor are clear. They are short of cash for each day they have to wait for payment. Liquidity which is needed for acquisitions, investments and/or to fulfil new contracts. And who can be certain that the outstanding payment will ever be received?
Factoring removes this uncertainty: creditors sell their accounts receivable to a third-party called a factor, meaning that money flows into their account immediately or on the date when payment is due. Depending on the factoring model, the burden of payment reminders and debt collection, as well as accounts receivable accounting, may also be passed to the factor. Particularly persuasive: factoring protects against bad debt losses.
Factoring provides these advantages:
The factor pays the invoice amount. Companies can rely on having money to conduct business and make investments.
Better balance sheets
Factoring improves the equity ratio.
With factoring, businesses can reduce their dependence on their house bank.
Late payments or even bad debts: thanks to factoring, creditors are protected. The risk can be transferred to the factor.
On request, companies can outsource all their accounts receivable accounting to the factor. This creates more breathing space for the company’s core business.
Every year, more companies choose to factor their invoices; particularly small and medium-sized businesses are entering into factoring contracts. Within Germany, the German factoring association, which covers more than 98% of the market, had a turnover of 80.5 billion euros in the first half of 2018 alone (an increase of 3.6%).
Fundamentally, factoring is aimed at all branches and requirements. An existing credit insurance can be custom-fitted into a factoring contract (single contract model) or the companies can coordinate both modules (dual contract model). If there is no existing protection from bad debt losses, this can be obtained via factoring. The credit risk is thereby simply passed on to the factor. Advantageous here: With factoring, the protection begins when the account is purchased – earlier than with most conventional credit insurances, which only start to apply for example when the invoice is due or when goods have been delivered. Either way, businesses gain extra security with factoring.
When structuring the factoring contract, companies also have several ways of adjusting the terms to allow the reduction of workload and/or costs. For example, companies can, on request, outsource all their accounts receivable accounting to their factor. And are thereby able to concentrate on what they do best: their core business.
A specialist broker can support businesses to help find the contract model which best fits their needs.