All things you need to know about Factoring

Factoring is a common business practice for financing companies. It usually takes place within a framework contract. The core of the factoring is the regular sale of receivables. In this case, a company sells a claim, i.e. an open invoice, against a customer to another company. This is called a factor, factoring company or factoring institute. The claim then belongs to the factoring company, which then asserts it to the customer. Due to intersections with the activities and competences of collection agencies, factoring and collection services are often offered from a single source.

What is factoring Components?

In addition to the sale of receivables – also called receivables assignment – further components are part of factoring. You need to know now what is factoring. An important criterion is of belief. This refers to the assumption of a guarantee for the solvency of a debtor by the factoring company. If the customer does not pay in the end, this risk lies with the factor.

In addition, pre-financing is part of the factoring requirement. If a company has a legitimate claim against a customer, it often has to wait some time for the due payment. As part of a factoring agreement, this waiting time is eliminated. The factor finances the claim to the customer. Depending on the contract, the company receives a large portion of the money due to him immediately instead of after 30 days or more. Pre-financing rates of 80 to 90% are usual. The remainder of the receivable is paid to the company if the customer or debtor has paid.

The third component of the standard factoring is the assumption of accounts receivable management. These include accounts receivable accounting, regular credit checks of customers, dunning and collection. These services are provided by the factoring company for its customers. For example, the factoring customer no longer sends reminders. These processes are handled by the factor for him. This is also the overlap with the activities and competencies of a collection agency.

The Advantages of Factoring

Companies of all sizes are now using factoring as a means of financing. This increases their liquidity. The company immediately has more money available. Instead of waiting a long time for payment of the receivables, it immediately has the funds from an order. This has several positive effects. Increased liquidity improves the equity ratio, the balance sheet and, in the long or medium term, the credit rating. If a company wants to apply for a loan, it has better opportunities through factoring. You can find out more about improving creditworthiness on In addition, factoring protects against bad debts. If the due claim cannot be recovered, for example by insolvency of the customer, the factor takes over the loss through the belief. Ultimately, companies can save fixed costs through factoring contracts. Accounts receivable accounting and dunning are the responsibility of the factor. No personnel, time or resources are required for these activities.

The Sub form of Factoring

Different areas do not want to give away some companies, such as the sensitive dunning process.

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