Factoring is a form of financing that can provide relief, especially in the case of liquidity bottlenecks. This is achieved by a company selling outstanding receivables to a factoring company and receiving the equivalent value paid out directly.
How does factoring work exactly?
It follows a simple logic and can be imagined as a triangle relationship with three parties: the company, the client and the factoring company.
Example
A company invoices a customer for services provided. This gives rise to a claim against the customer. If the company does not want to wait for the payment of the customer, it can sell the receivable to a factoring company. In this case, the company receives the equivalent value of the outstanding receivable immediately. The customer no longer pays his receivable to the company, but to the factoring company.
In what situation is factoring worthwhile?
Factoring can be considered as worthwhile in three cases:
• Companies experiencing strong and rapid growth. It can be advantageous if the company does not have to wait too long for payment from customers. Liquid funds can thus be used more efficiently.
• Companies that generally grant their customers long payment terms.
• Companies that are in a crisis can use factoring to create new liquidity in order to avoid bankruptcy.
Factoring has gained massive popularity in recent years, especially among SMEs. In particular, companies that grant customers two to three months or even longer payment terms often use factoring as a form of financing.
