What is factoring?

Factoring is a form of financing that can particularly help alleviate liquidity bottlenecks. This is achieved by a company selling open receivables to a factoring company and receiving the equivalent amount immediately in return.

How does factoring work exactly?

The basic principle is very simple and can be imagined like a triangle with three parties: the business, the customer, and the factoring company. Here is an example:

A company invoices a customer for services rendered. This creates a receivable from the customer. If the company does not want to wait for the customer to pay, it can sell the receivable to a factoring company. In this case, the company receives the value of the open receivable immediately. The customer no longer pays their debt to the company, but to the factoring company.

Who benefits from factoring?

Factoring is primarily beneficial in three cases:

·        When a company is experiencing strong and rapid growth. Here, it is advantageous for the company not to have to wait too long for customer payments. Liquid funds can thus be used more efficiently.

·        Companies that generally grant their customers long payment terms.

·        Companies that are in a crisis can create new liquidity through factoring to prevent bankruptcy.

Especially among SMEs, factoring has gained massive popularity in recent years. In particular, companies that grant customers two to three months or even longer payment terms often use factoring as a form of financing.