How factoring can benefit for our business

Are you wandering what is factoring? Factoring is the regular recurring purchase of receivables from deliveries of goods and services for immediate payment of the purchase price. In practice this means: In factoring, a company sells its outstanding receivables to a factoring company (factor). For this, the company is immediately credited an amount that amounts to about 80 to 90 percent of the respective external balance. In addition, the factoring company usually assumes the default risk as well as the entire debtor management, from dunning to debt collection.

The factoring contract

In the factoring agreement, the factoring customer (customer) undertakes the factor to offer all – in the future – receivables arising from delivery and service for purchase (obligation to supply). The factoring agreement with a basic term of 1-2 years basically includes the purchase of all arising receivables.

Changes in accounts receivable accounting

Invoices are to be numbered consecutively and submitted to the factor in agreed cycles. The term of payment may not exceed 90 days. The payee in factoring is no longer the factoring customer but the factoring company. The debtor can only pay to the factor with debt-discharging effect. This change is indicated to the customer by a note on the customer’s invoice. The customers are also informed in advance by the customer about the cooperation with the factor.

In addition, the factor will take over all accounts receivable and receivables management, including dunning, extrajudicial and judicial recovery. Incoming claims are processed by the factoring customer in coordination with the factor. As far as credits are to be issued, these are also booked by the factor.

Assumption of credit risk

The factor assumes the default risk in full by purchasing the receivable. Approximately 80 to 90 percent of the invoice amount purchased less the factoring fees are transferred to the factoring customer when the invoice is submitted.

The company receives a detailed statement of the settlement items as a daily statement. About 10 to 20 percent of the purchased invoice amount will be retained (blocked account) and credited to the factoring customer when paying by the customer – at the latest, however, after 150 days. This also applies if the customer does not pay.

The factor constantly checks the creditworthiness of the debtors during the cooperation. The factoring customer applies for a credit limit amounting to the maximum expected receivables from its debtors. After a positive check, each customer is granted a credit limit within which the factor is obliged to purchase the factoring customer’s receivables.

If necessary, the credit limit will be adjusted to the credit development. If a credit limit is rejected, the company will be informed immediately.