Factoring example
The process of factoring is quite simple.
- At the beginning you stand as a company that sells products or services to a customer for money. As long as the customer has not paid you, you have an outstanding claim against him.
- It is important that you can prove the existence of this claim and its legality to the factor. This is also called ” verity “. Because only if the claim is legally flawless will the factor buy it from you.
- In addition to the verity, the debtor’s creditworthiness is also important for the factor. Because if he buys the debt from you, he wants to be sure that he will get his money afterwards.
- If the factor knows about the verity and creditworthiness and has checked both, he will buy your receivables from you.
- That happens relatively quickly. You usually have around 90% of the amount due in your account after just two days. You have increased your liquidity and the factor takes over the debtor management and moves the debtor to pay the receivable.
- As soon as the debtor has transferred the money to the factor, you will receive the remaining amount due from there.
However, the factor does not act out of pure good-naturedness; he naturally wants to be paid for his services. We will come to the cost of this service below.
What is a factoring contract and how do you find the right one for you?
According to GRADPHYSICS.COM, the factoring contract regulates the sale of your claim to the factor. This records the most important points of your agreement in writing. First of all, it must be clarified whether you have agreed on real factoring or fake factoring. Because then the contractual provisions (sales contract or loan agreement) are based.
In this case, real factoring means that the factor buys the claim from you and takes on the risk of default. This is a purchase contract that is regulated in §§ 433 ff. BGB .
Fake factoring would mean that the risk of default stays with you. If the factor cannot collect the money, you have to repay the amount already received. In this case, it is not a purchase agreement, but a credit agreement. This is regulated in §§ 488 ff. BGB .
You should use this distinction to determine which type of contract is suitable for you.
What does the factoring contract say?
As a rule, you will conclude a framework contract in which you can agree both basic and individual regulations.
The basic regulations include the following points:
- The exact designation (name, address) of the factor and vendor
- All details about the requirements, for example the type, quality and content
- A limit up to which the factor buys the receivables
- The term of the contract (usually 1-3 years)
- A notice period (usually three months)
- Factoring fees
- Pre-financing interest
- Examination fee (for checking the debtor and his creditworthiness)
- Possible additional fees for follow-up exams
- Period for the submission of the invoices and the payment of the amount
- The amount of a security deposit
In addition, you can or should even make individual agreements on the type of factoring. In the next section we will explain which types are available here.
Factoring contract template
You can find samples of the factoring contract on some reputable sites on the Internet. However, the templates can only mention the basic framework conditions. You have to make sure that you also incorporate the individual points.
Start by naming the factor (including address details) and your name (plus address).
Then you list the most important points in order:
- Mention of the demands
- Maximum amount (limit) of the receivables to be purchased
- Term of the claims
- Factoring Fees and Terms
- Interest conditions
- Other examination fees (monitoring fees, rating fees, third-party costs)
- Guarantee and Retention Conditions
- Billing modalities
- Assignments
- Payout
- Authorization to sign
- Final provisions
- signature
Don’t forget to include individual agreements as well!
Types of factoring
There are different types of factoring, some of which are presented here as examples:
Reverse factoring
When Reverse Factoring is a type of self-financing. This is because you have a reverse factoring provider pre-finance your goods purchases. This is a good option if you are currently a little tight on cash or simply need more material to be procured and faster than planned in the high season and you have to react quickly to fulfill the orders. However, this is quite time-consuming and you also have to conclude a reverse factoring contract with the suppliers concerned .
Real & fake factoring
The difference between the two forms is the assumption of risk and failure protection. With real factoring , after buying the receivables, the factor assumes the risk that the debtor may not pay his debts. With fake factoring , the risk sticks with you.
Export factoring
The export factoring plays a role in international transactions. If you can expand globally, that’s great for your business, but you also have to deal with debtors who are overseas. This also entails certain risks, especially the currency risk. And recovery and enforcement abroad is rarely successful. Export factoring specialists take care of these problems for you and buy the receivables and collect them through their foreign branches.
Import factoring
In import factoring , a factor domiciled in Germany is liable to another foreign factor abroad for the domestic debtor’s solvency. This contractual assumption of liability is similar to export factoring.
Clipping factoring
With section factoring, you do not assign all of the debt to the factor, but only part of it. For example, you can explicitly exclude some customers from this. Usually these are those for whom factoring would not be worthwhile, i.e. customers with very low invoice amounts . Or those who always pay their bills very quickly.
In-house factoring
A factoring company usually offers a complete service that takes on various areas (accounts receivable management, dunning and collection processes) (full service factoring). With in-house factoring , however, the factor only takes over protection against failure, everything else remains with you. The factor then took over the rights to the receivables (and paid you), but they also have the risk. While you are the one who continues to make sure the money comes in. It is necessary that you work closely with the factor. In-house factoring is often offered as silent factoring . We come to that in the next paragraph.
Silent factoring & open factoring
The difference here is whether the debtor, i.e. your customer, is informed that you have assigned the claim to the factor or not. With open factoring, you inform him of this and at the same time ask for the open amount to be transferred to the factor. With silent factoring , the customer does not find out about this. But you have to give the factor’s bank details on the invoice so that the money ends up there when you pay and not in your accounts.
