If we want to compare factoring with a bank loan, we must first know what factoring actually means. The term factoring comes from the English Factura and means invoice. Factoring is a method of sales financing. Receivables from goods or services are sold to a factoring company, which also assumes the full credit risk. Medium-sized companies in particular use this source of financing, which is a sales-congruent working capital financing.
Factoring and its advantages
Genuine factoring reduces receivables and liabilities in a company’s balance sheet. This means that the liquidity, but also the equity ratio, is improved. In addition, corresponding administrative tasks are no longer necessary in debtor management. This is where we talked about real factoring.
But what is the difference between real and fake factoring?
With genuine factoring, the default protection is assumed by the factoring provider, whereas with fake factoring the default risk remains with the entrepreneur. This naturally also has an effect on the factoring costs, which are higher with genuine factoring. In order to better understand the entire process, a small example is given below.
An entrepreneur has outstanding invoices worth 30,000 GBP. When the entrepreneur now contacts a factoring company, the company checks which receivables are eligible. If the debtor has a poor credit rating or if a debt collection agency has already been contacted, the matter is settled. If, however, the factoring company takes over the outstanding receivables, a corresponding contract is concluded which regulates the entire transaction. The entrepreneur now receives the 30,000 GBP, less a fee which is about 2 to 3% of the outstanding debt.
In summary, the advantages:
- Liquidity gain, as the financial scope is expanded
- Risk protection in the event of the customer filing for insolvency
- Rating improvement, since the receivable can be posted from the balance sheet
- Reduced workload, as the accounts receivable management can be outsourced
- no long-term contractual obligation towards the factoring company.
The disadvantages of factoring
Certainly, there are not only advantages in factoring, but the disadvantages are limited. The factoring company naturally demands a fee, which is dependent on turnover. This fee is between 0.5 and 3 percent of the purchased debt. On top of this there is a fee for checking the creditworthiness of the own customer. Furthermore, factoring is not suitable for all companies/businesses.
Industry and wholesalers can have their receivables secured by factoring. Factoring is not suitable for retailers. It is also difficult to find a factoring company for service companies. But there are factoring companies that also work with service providers. So it is not hopeless.
Find factoring providers
In factoring, too, there are innumerable providers who canvass for the customer’s favour. More than 250 companies are active nationwide offering the purchase of receivables. There are certain target groups, different requirements for the acceptance of receivables and different factoring variants. The following features should be considered when selecting a good factoring provider:
- Trust in the factoring provider
- Transparency (overview of the receivables inventory)
- Growth and the economic development of the provider
- Individuality through individual solutions
- the contractual conditions of the factoring agreement
- the fee structure of the provider
- Service and support by a personal account manager.
If these features are present, it can be assumed that the choice of provider is sound. There are more than 50 factoring providers in the network, so that the right provider can be found very quickly.
Conclusion on factoring vs. bank credit
Factoring therefore has some notable advantages over a bank loan which cannot be denied. There is no lengthy credit assessment. For the factoring company, it is not the creditworthiness of the company that counts, but that of the customer who receives the invoice from the company. This enables the company to grant its customers longer payment terms, as possible payment defaults are secured. Furthermore, factoring increases creditworthiness and by shortening the balance sheet, the credit rating is also improved.
However, with online credit there are also some exceptions to applying for credit without Experian. We cooperate with German lenders who can also obtain a bank loan in case of negative Experian.
Factoring is a useful supplement to corporate loans, especially since factoring is much less complicated. However, it is very important to know that factoring should not be used as the sole financing method. It is always an additional financing.