Many business owners are familiar with this scenario: While their suppliers expect payment within a month, major customers take 60 or 90 days to settle their invoices. Foreign business partners often pay even later. But what if companies are waiting for these payments—perhaps because they want to invest the money in acquiring new customers or fulfilling a newly secured order? It often takes a long time for a company’s primary bank to extend its credit line. Alternative debt financing can be arranged much more quickly. “Factoring offers companies the opportunity to manage their liquidity with pinpoint precision,” says Stephan Ninow, managing director of the factoring specialist abcfinance. In this process, companies sell short-term receivables from sales of goods or services to a factoring specialist. “The factoring client decides whether to sell all receivables in a single transaction or, for example, to continue handling those from a specific customer themselves,” explains Ninow.
90 percent of the amount is paid immediately
In return, the company immediately receives up to 90 percent of the gross amount; the remaining 10 percent is paid out as soon as the invoice is settled. “With this money, companies can also make short-term or unplanned investments and focus on their core business,” emphasizes the expert. Another advantage: The factoring service provider bears 100 percent of the risk of bad debt. Factoring companies charge a fee for their services. The amount of this fee is primarily based on the total volume of the invoices submitted. “In return, factoring users can pay their invoices on time and often benefit from cash discounts. These usually offset the fees. Because companies also gain funds to invest in new business, for example, factoring is doubly worthwhile for them,” explains Ninow. More and more companies—especially small and medium-sized enterprises—are using factoring. According to the German Factoring Association, growth in 2015 was 7.5 percent compared to the previous year. There are hardly any reservations left. “Word has gotten around that only companies with valuable receivables, as well as good creditworthiness and profitability, are suitable for a long-term factoring relationship. In this respect, the use of factoring also confirms the quality of the company,” says Ninow.
