The Federal Association of Factoring for Small and Medium-Sized Enterprises (BFM) has published the results of a member survey, according to which more and more small and medium-sized enterprises are using factoring to finance sales. In 2019, the purchase volume increased by 8.7 percent. Many medium-sized companies expect a constant or even growing new customer business. To attract customers and retain existing customers, salespeople often offer payment terms. The sale of open receivables to a factor protects against bad debts and ensures independence from the credit decisions of the house bank. In addition, liquidity increases with increasing sales.
Why is factoring increasing in medium-sized companies?
If a medium-sized company needs capital, a bank loan means long negotiations and the fulfilment of numerous conditions. The requirements of banks have risen sharply as a result of the Basel III regulations. A medium-sized company must prove certain sales figures and provide collateral in order to obtain a bank loan. Start-ups or certain industries can be excluded from lending altogether. For these companies, factoring is a cost-effective alternative. The factor does not require collateral and pre-finances outstanding receivables at a favorable interest rate. At the same time, the sale of receivables offers other advantages, such as the regular credit check of the debtors and the relief of one’s own accounts receivable accounting.
Factoring and accounts receivable
Most factoring companies offer different factoring variants. In the case of in-house factoring, debtor management remains with the company. However, many medium-sized companies opt for the full service factoring variant. With this type of factoring, the trained employees of the factor take over the monitoring of incoming payments. If a buyer does not meet his payment obligation by the due date, the factor will send a reminder for payment. In the event of a further delay in payment, the factoring provider carries out all the steps of a professional dunning process. The necessary collection measures are also initiated by the factor. This relieves the debtor accounting department of the creditor, who can also outsource this part of his company completely to the factoring provider.
Opportunities of factoring
Medium-sized companies benefit from the sale of outstanding receivables to a factor through several advantages:
- rapid increase in liquidity,
- Combination of factoring and outsourcing of accounts receivable relieves the company,
- Protection against bad debts,
- more independence from the house bank,
- Balance sheet reduction and higher equity ratio,
- better rating with suppliers, banks and business partners.
Factoring not only offers medium-sized companies liquidity that increases with turnover and 100% protection against bad debts, but also has a positive effect on the balance sheet. The open invoices are sold to the factor. As a result, the receivables on the assets side of the balance sheet are written off and lead to a reduction in the balance sheet. This ensures a better equity ratio and thus a better rating of the company when evaluated by a credit institution or a business partner.
Factoring as a way to secure liquidity in times of crisis?
Through factoring, companies can secure their own liquidity even in times of crisis. This is also currently evident in times of Corona. Companies from numerous industries had to shut down their business operations or even stop them altogether. If these companies still have invoices to pay with a payment term, it may happen that the liquid funds are not sufficient by the payment date. Companies that have sold the outstanding receivables to a factor in good time do not have to fear insolvency. The factor has already transferred about 80% of the invoice amount to the seller 1-2 working days after submission of the invoice. The agreed factoring fee is deducted beforehand, which is usually in the lower discount range depending on turnover and factoring variant. The remaining 20% also follow reliably when the invoice is due. The company can rely on the receipt of payments and does not have to fear a collapse in its own liquidity.
Factoring – liquidity and growth for medium-sized companies
Factoring offers SMEs an attractive form of corporate financing. In addition to in-house factoring, companies can do without their own accounts receivable accounting and thus save money, time and resources by outsourcing the process. The transfer of tasks or the complete outsourcing of accounting processes to specialized BPO partners provides relief in one’s own accounting and creates freedom that medium-sized companies can use to acquire new customers and expand their own company.
What experiences have you had with factoring? Do you use full-service factoring or is the entirety of accounts receivable in-house? We look forward to your comments.
Image source: Pixabay, Photographer: Credit Commerce
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