If we want to compare factoring with a bank loan, we first need to know what factoring actually means. The term factoring comes from the English invoice and means invoice. Factoring is a method of sales financing. Receivables from goods or services are sold to a factoring company that also assume the full credit risk. Medium-sized companies in particular use this source of finance, which represents revenue-matched working capital financing.
Factoring and its advantages
Real factoring shortens receivables and payables in a company’s balance sheet. This means that liquidity, but also the equity ratio, is improved. In addition, corresponding administrative tasks are eliminated in accounts receivable management. Here we talked about real factoring.
But what’s the difference between real and fake factoring?
With real factoring, the default protection is taken over by the factoring provider, with fake factoring the default risk remains with the entrepreneur. This naturally also affects the factoring costs, which are higher in real factoring. To better understand the whole process, here is a small example.
An entrepreneur has outstanding invoices worth 30,000 dollars. When the entrepreneur contacts a factoring company, the factoring company checks which claims are actually possible. If the debtor has a bad credit rating or if a debt collection agency has already been turned on, the matter is settled. However, if the factoring company takes over the outstanding receivables, a corresponding contract is concluded that regulates the entire transaction. The entrepreneur now receives the 30,000 dollars, less a fee that is about 2 to 3% of the outstanding claim.
In summary, the advantages are:
- Liquidity gain as the financial scope is expanded
- Risk protection if the customer should file for bankruptcy
- Rating improvement since the receivable can be posted from the balance sheet
- Relief of work, because accounts receivable management can be outsourced
- no long-term contract with the factoring company.
The disadvantages of factoring
There are certainly not only advantages to factoring, but the disadvantages are limited. The factoring company naturally charges a fee that is dependent on sales. This fee is between 0.5 and 3 percent of the purchased receivable. There is also a fee for the credit check of your own customer. In addition, factoring is not suitable for all companies. Industry and wholesalers can have their accounts receivable covered by factoring. Factoring is out of the question for retailers. Service companies will also find it difficult to find a factoring company. But there are factoring companies that also work with service providers. So it’s not hopeless.
Find factoring providers
When it comes to factoring, too, there are countless providers who advertise for the customer’s favor. Nationwide there are more than 250 companies that offer the purchase of receivables. There are certain target groups, different requirements for accepting receivables and different factoring options. The following features should be considered when choosing a good factoring provider:
- Trust the factoring provider
- Transparency (overview of receivables)
- Growth and economic development of the provider
- Individuality through individual solutions
- the contractual terms of the factoring contract
- the provider’s fee structure
- Service and support from a personal account manager.
If these characteristics are present, it can be assumed that the selection of the provider is solid. There are more than 50 factoring providers online so that the right provider can be found very quickly.
Conclusion on factoring vs bank credit
Factoring therefore has a number of noteworthy advantages over a bank loan that cannot be denied. There is no lengthy credit check. It is not the creditworthiness of the company that counts for the factoring company, but that of the customer who receives the invoice from the company. This means that the company can grant its customers longer payment terms, as possible payment defaults are secured. Factoring also increases creditworthiness and the shortening of the balance sheet also improves the credit rating.
However, there are some exceptions to applying for a loan without credit record when using online credit. We cooperate with German lenders who can get a bank loan even with a negative credit record.
Factoring is a useful addition to corporate loans, especially since factoring is much more straightforward. However, it is very important to know that factoring should not be used as sole funding. This is always additional funding.
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