What is factoring?
In factoring, outstanding receivables are sold in order to generate additional liquidity. It is therefore a fast form of corporate financing.
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More InformationFactoring simply explained
Factoring is a modern and flexible financing instrument that enables a company to transfer or sell open receivables for services already rendered in full to a factoring provider, also known as a factor. This video explains the process in simple terms.
The special thing about full service factoring: You not only receive money immediately, but also protection against bad debt losses and complete accounts receivable management including dunning.
Definition What is factoring?
Factoring means: You sell your outstanding receivables (e.g. from deliveries of goods or services) to a factoring company in order to obtain immediate liquidity. These receivables are addressed to your customers, also known as debtors. They are therefore also referred to as advance financing or advance payment of receivables.
The factoring agreement is usually concluded for several years and regulates either the sale of all of a company’s receivables or – in the case of partial factoring – only certain customer groups. Factoring thus secures the long-term financing of your working capital.</p
How does factoring work?
The factoring offer from A.B.S. is aimed at medium-sized companies with a turnover of between CHF 500,000 and around CHF 50 million. Start-ups or companies in restructuring phases also benefit from special solutions. The process is simple:
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- Goods delivery / service: A company (= factoring client) provides a goods delivery or service for its customer (= debtor). This results in a receivable. The service must be rendered in full.
- Sale of receivables / invoice transfer: The factoring customer transfers its invoice data and sells the receivable to A.B.S. With the sale of the receivable, the rights to the receivable are transferred to A.B.S.
- Immediate payment: A.B.S. pays you up to 90 % of the invoice amount immediately. The remainder follows (less discounts, rebates, etc.) after full payment has been received from the customer.
- Payment of the receivable by the debtor: Once the agreed payment term has expired, your customer pays A.B.S. directly and you can relax and concentrate on your core business.
- Goods delivery / service: A company (= factoring client) provides a goods delivery or service for its customer (= debtor). This results in a receivable. The service must be rendered in full.
What are the specific benefits of factoring?
Factoring offers you many tangible advantages – above all: you can turn the services you have already provided into liquidity in the shortest possible time. This allows you to plan your income and actively utilise financial leeway. In concrete terms, this means
- You are financially independent of the payment term granted,
- don’t have to wait for your customers to pay you
- and are immediately able to act again
In this way, companies create the necessary financial leeway for investment and growth from their own resources and with matching sales – without the need for a bank loan!
Further advantages of factoring
More service for your customers
Offer longer payment terms without jeopardising your own liquidity – a clear competitive advantage, as you receive your money immediately after invoicing with factoring.
Security in the event of payment defaults
Even if payment is cancelled – with A.B.S. default protection, you are covered up to 90% against bad debts. This means: no payment risk, secure payout.
More working capital for your growth
Use your liquidity to make targeted investments and plan for the long term – independently of bank loans.
Relief for accounting and administration
We take over the entire debtor management including dunning and debt collection. You save time, costs and nerves.
Flexibility in financing
Factoring grows with your turnover – without rigid credit limits or lengthy renegotiations with the bank. This means you remain adaptable at all times, even during order peaks or seasonal fluctuations.
Better balance sheet & stronger rating
Factoring improves your balance sheet ratios, increases your equity ratio and strengthens your rating – ideal for better credit terms or new investors.
When is factoring useful?
If your customers are taking their time to pay your receivables – whether due to competition or deliberate delays – factoring is an efficient and established financing instrument that allows you to receive the equivalent value of your receivables earlier and therefore utilise these funds directly for new investments or expenditure on goods or personnel. The cash conversion cycle is therefore significantly shortened – and that is a decisive competitive advantage for entrepreneurial growth.
In short: if you grant or have to grant your customers long payment terms, then factoring makes sense.
Factoring is particularly suitable when:
- Your customers need long payment terms
- You want to finance rapid growth
- Your bank loans are exhausted
- You want to improve your equity and rating
- You want to protect yourself against payment defaults
Would you like to know whether factoring is right for your company?
Then it’s best to use our free factoring checklist. In just a few clicks, you can get an initial assessment of whether factoring is right for your company – simply, quickly and without obligation.
What requirements must a company fulfil for factoring?
Factoring is a financing instrument for companies with B2B business and recurring customers. However, factoring is not suitable for financing project business, invoices in accordance with VOB, invoices to private customers (B2C) and individual receivables. In principle, the outstanding receivables in factoring can result from deliveries of goods or services. It is important to have a low concentration of debtors and no high dependencies on individual customers as well as payment terms of a maximum of 120 days.
Equally important is that:
Practical example: How does factoring work?
A company for high-precision mechanical components delivers goods with a value of CHF 20,000 to a customer on 12 April and issues an invoice for the components. The payment target for the invoice is 90 days. However, the company would like to be able to utilise the blocked capital more quickly and, for example, purchase new raw materials. For this reason, the company assigns the receivable to a factoring provider. As a result, the company is transferred 90% of the invoice amount owed, i.e. CHF 18,000, within 24 hours.
In the event that the customer does not pay the invoice within 90 days as agreed, the factoring provider is responsible for sending reminders and initiating the necessary dunning processes in consultation with the customer. In addition, factoring providers, such as A.B.S. Factoring AG, also provide protection for bad debt losses in the case of a full-service factoring solution, i.e. if the customer is not in a financial position to pay the invoice.
As soon as the debtor has transferred the outstanding amount, the remaining 10% (CHF 2,000) of the invoice amount is transferred to the manufacturer of the high-precision components. Any credit notes, rebates or discounts are already deducted from this 10%. Through factoring, the company gains immediate liquidity quickly and effectively and does not have to worry about the creditworthiness or payment behaviour of the debtor.
What does factoring cost?
The costs are essentially made up of two parts:
- Factoring fee → depending on turnover, number of debtors and invoice volume
- Factoring interest → Calculated on a daily basis depending on the financing volume
Good to know:
Many companies compensate for the factoring costs by utilising cash discounts, better purchasing conditions and reduced administrative costs – and even make a profit at the end of the day.
Factoring in the balance sheet: an overview
| AKTIVA | TCHF | PASSIVA | TCHF |
|---|---|---|---|
| AV | 100 | Capital | 750 |
| Warehouse | 2,500 | Bank | 2,150 |
| Receivables | 1,500 | Suppliers | 1,200 |
| Balance sheet total | 4,100 | 4,100 |
| AKTIVA | TCHF | PASSIVA | TCHF |
| AV | 100 | Capital | 750 |
| Warehouse | 2,500 | Bank | 1,650 |
| Claims | 150 | Suppliers | 350 |
| Balance sheet total | 2,750 | 2,750 |
| ER WITHOUT factoring | ER WITH factoring | |
| Turnover | 12,000,000 | 12.000.000 |
| Discounts | -96,000 | / |
| Total output | 11,904,000 | 12.000.000 |
| Input of goods | -8,500,000 | -8.449.000 |
| Gross profit | 3,404,000 | 3,551,000 |
| Interest expenses | -118,250 | -141,375 |
| Factoring fee | / | -90,000 |
| Other costs | -3,000,000 | -3.000.000 |
| Result before tax | 285,750 | 319,625 |
What types of factoring are there?
Many types of factoring are offered on the factoring market. The choice of the appropriate type of factoring should be based on the payment behaviour of the debtors, the liquidity requirements and the customer structure. The costs and services may vary depending on the type of factoring.
The following common factoring variants are offered on the factoring market:</strong
- Real factoring and non-genuine factoring
- Open factoring and silent factoring
- Export factoring and import factoring
- Inhouse factoring
- Reverse factoring
- Section factoring
Factoring in direct comparison
Factoring should not be confused with debt collection. While a factoring company takes on receivables management as a whole, including dunning and debt collection, a debt collection company usually only becomes active when individual receivables are already in arrears.
Basically, debt collection and factoring have an identical goal: to preserve a company’s liquidity. In detail, however, the tasks of a debt collection company differ significantly from the work of a factoring provider:
- With factoring, the rights to the receivable are transferred to the factor; with debt collection, they – and therefore the default risk – remain with the commissioning company.
- Factoring takes over receivables management at a much earlier point in time: when the invoice is issued. Debt collection only takes effect when the invoice is already in arrears.
Those who opt for factoring save themselves the effort and costs of debt collection proceedings.
Factoring and forfaiting are related terms. Forfaiting is also a sale of receivables. However, there are three key differences between factoring and forfaiting:
- The first difference between factoring and forfaiting is that forfaiting is usually used for very capital-intensive transactions. Factoring, on the other hand, is generally used for medium-sized capital amounts – in other words, amounts that are more typical for SMEs.
- Forfaiting is generally used for large individual receivables. Factoring, on the other hand, usually relates to a large number of receivables or, in the case of partial factoring, to selected receivables.
- In addition, factoring usually relates to services or deliveries that have already been provided, while forfaiting is used for future services.
Assignment and factoring are closely related financing instruments. Nevertheless, there are key differences:
- The primary difference between assignment and factoring is that assignment is not a sale of receivables, but merely the assignment of receivables to collateralise loans.
- In an assignment, the receivable is assigned to a creditor – for example a bank. In return, the financial institution grants the company a credit line that allows it to settle its liabilities. As the bank applies significant haircuts to the valuation of the assignment as loan collateral, the gain in liquidity is much lower than with the sale of receivables through factoring. The balance sheet is also not relieved by assignment by cession.
Why A.B.S. Factoring?
Factoring is becoming increasingly popular. Today, companies in over 30 sectors use this flexible form of corporate financing on a daily basis. Typical factoring customers are primarily the retail and trade brokerage, metal processing, the food industry, mechanical engineering, the manufacture of chemical products, vehicle construction, the electronics industry and the paper, publishing and printing industry.
As a competent financial partner, A.B.S. not only offers factoring, but also individual advice, fast processing, fair conditions and over 40 years of market experience.
