What percentage of companies use invoice factoring?

Factoring: more liquidity for your company

Factoring is an interesting one Financing optionto increase the liquidity of your company in the short term. This type of financing is used more and more by start-ups and by small and medium-sized companies in order to get money quickly and comparatively easily. Have you never heard of factoring or are you even thinking about selling goods directly from a production facility? Find out now what is behind this type of corporate finance - maybe this is a good alternative to corporate loans and fits perfectly into your financial plan.

Selling invoices as a business model?

Selling invoices doesn't necessarily sound like a clever business model at first. The seller receives his money quickly. But what makes this model attractive to buyers? First of all, the basics of factoring: You have delivered your product or service to your customer and billed him for it. However, your customer cannot pay within the agreed period. Here comes the Factoring company into play: Put simply, it first pays you the outstanding invoice amount and then takes the money back from your customer in the next step.

Factoring companies will too Factor called. This factor can be a bank or another financial service provider. There are enough providers on the market that specialize in factoring, for example Fundflow or Billie. A complete list of all factoring institutes approved in Germany can be found at BaFin.

Factoring explanation: This is how the process works

The basic requirement is a service that has already been performed or a product that has been delivered for which you have sent an invoice to your customer. As an entrepreneur, you basically determine yourself how long you allow your customers or business partners to pay outstanding claims. You can statutory payment deadline of thirty days or agree individual deadlines with your customers. According to the Atradius Payment Practices Barometer (2018), that's average payment term at twenty days. In practice, customers often run out of time to pay invoices. As an entrepreneur, you can only wait within this period. The money you are expecting will not be available for further investments for so long.

In the case of start-ups or in small and medium-sized companies, these often result in outstanding payments Liquidity constraints. To compensate for short-term financial bottlenecks, companies often apply for corporate loans. However, it can take some time before the money is actually available to them. Banks first check the Applicant creditworthiness. In the case of start-ups, the business plan replaces the examination. An alternative to quickly and quickly increase the liquidity of your company is factoring.

The factoring process works as follows:

  • Your company delivers a product / service and issues an invoice to the customer for it.
  • In order to get your money faster, your company commissions a factoring company, the so-called factor.
  • The factor checks whether your customer is solvent (credit check).
  • If the check is successful, your company sells the receivable to the factor (sale of receivables).
  • The factor transfers a large part of the invoice amount (usually eighty to ninety percent) within one or two working days.
  • Your customer now pays the invoice, i.e. the outstanding claim, directly to the factor.
  • After receiving the money, the factor transfers the rest of the invoice amount to you, but keeps a small part as commission. This is usually between half a percent and five percent.

Types of factoring

There are different types of factoring. Depending on the model, the factoring companies take on different tasks. Here are three examples:

Full service factoring

If you are for the Full service factoring decide, you will receive the all-round carefree package: The factor assumes liability for the receipt of the claim (Del credere protection), receivables financing and your complete receivables management. Your advantages: Your entire turnover is pre-financed and you save personnel costs in accounting. The factoring companies can also pay for this service accordingly.

Individual factoring

You decide which invoices to sell to the factor - according to your needs. The Individual factoring is a good way to assign high receivables with long payment terms.

In-house factoring

This variant is comparatively cheap and therefore particularly interesting for founders and start-ups: The accounts receivable, dunning and collection processes remain in your company, which reduces the fee charged by the factoring company.

Whichever variant you choose: Inquire exactly with the possible providers, about the process and what services you will receive.

Costs and risks: this is what you can expect from factoring

Factoring companies require one Fee for their service. This is based on the amount of the invoice: For example, if you sell accounts receivable for ten thousand euros, you will initially receive eighty to ninety percent of the invoice amount, depending on the agreement. You will receive the remaining payment as soon as your customer has paid the invoice at the factor. Most of the factoring providers withhold between half and five percent of the outstanding payment as a service fee. For this example you have to expect a fee of fifty to one hundred euros.

No risk

Factoring companies are monitored by the Federal Financial Supervisory Authority (BaFin). So you don't have to worry about not getting the outstanding balance back.

To your Payment risk to reduce, you can opt for a type of factoring that reduces the Del credere protection includes. Then the factor takes on the risk of payment default. This means: If a customer does not pay on time, you will still get your money and it is the factor's responsibility to issue a dunning notice and to initiate any necessary debt collection measures.

Factoring: the most important things at a glance

This type of financing is especially recommended if you, as an entrepreneur, rely on staying liquid at all times in order to make fresh investments for new orders. Depending on the type of factoring, you save costs and can even earn more money, although you pay fees to the factor. An exciting alternative, especially for founders and smaller companies that need short-term money.

What is factoring?

The sale of accounts receivable to a financial service provider.

What are the advantages for me?

You get your money faster and you transfer the payment risk (normally).

Which costs arise?

As a rule, the factor charges a fee of half to five percent of the invoice amount.

Who offers factoring?

You can find tons of financial service providers online that specialize in this. For example: Fundflow, Billie, afinyo or rechnung.de.