Factoring is a type of financing that not only brings you benefits, but also generates costs. Therefore, you should always first compare whether you might be cheaper with a bank loan than with financing via factoring. Basically, you have to reckon with the following factoring costs: The factoring fee, the factoring interest and an inspection fee.
- Factoring fee
The factoring fee is due for the expenses of the factor and depends on your annual turnover. It is usually between 0.25 and 1 percent.
- Factoring interest
The factoring interest is an annual interest that depends on which part of your annual turnover should be paid out by the factor. It is usually between 4 and 8 percent.
- Test fee
The test fee varies depending on the factor. It depends on the type of factoring chosen and on the number of debtors and the risk of bad debts.
Advantages & disadvantages of factoring
Benefits based on examples
|High liquidity||High costs|
|Risk coverage||Only suitable for wholesale & industry|
|credit-worthiness||Customer relationships are put to the test|
|Time and money savings|
The advantages and disadvantages are examined in more detail below.
You have at least four important advantages when factoring:
- Above all, the rapid higher liquidity through the rapid payout of the factor. This gives you the chance to pay your suppliers faster and to take advantage of discounts or cash discounts .
- But your risk protection is also much better here, as you can shift the risk of your customer becoming insolvent to the factor. In such a case, insurance can also help, but it takes a long time for the insurance to pay you and the bank cannot help you immediately either, you would not have the money you take out as a loan anyway, because the customer is with one Bankruptcy is nothing more to be expected.
- Due to the higher liquidity and the paid receivables that arise from the payment of the factor, your balance sheet looks better and increases your creditworthiness .
- Aside from the improved numbers and higher liquidity, you also have some work relief , since the factoring company is about the collection and handling the accounts receivable management for you. That saves you time and money.
Disadvantages based on examples
According to HEALTHKNOWING.COM, you have to reckon with three main disadvantages:
- On the one hand with the high costs for the factoring company, which requires around 0.6 – 2.5% of the claim and also a flat rate for the credit check and interest.
- On the other hand, factoring may not even be considered for you. Because it is not suitable for all industries . Only wholesalers and the manufacturing industry can successfully protect themselves with this.
- Your customers are not happy about this because you question their payment behavior. This can affect your customer relationship.
Is factoring out of the question for your industry or company size or is it too expensive for you? You can also take the management of your outstanding receivables into your own hands! You can find everything you need to know in our article on accounts receivable .
Influence on company key figures
Increase in the equity ratio
Factoring has the greatest influence on your equity ratio , because this increase results directly from the increase in liquidity resulting from factoring.
Other key figures
Thanks to the greater financial leeway, you can also make investments or settle your liabilities to suppliers more quickly by taking advantage of discounts and discounts. This shifts many balance sheet items to the positive. Your rating in particular, which plays an important role in a loan, is rated much better by the banks.
When is factoring worthwhile?
Factoring can be worthwhile for you in certain situations, but you should check whether you actually use it on a case-by-case basis. You want to get your money, but you don’t want to annoy your customers with it.
It is worthwhile for you to use factoring in the following cases:
- During a very good order situation, as you can buy more material for the next orders with the quick income from factoring.
- With investment plans. Because in that case, you can raise the necessary funds for new machines or construction work through increased liquidity due to factoring.
- To protect against very high invoice amounts. Customers who have high order and invoice values are a risk to you if they don’t pay. Here you can protect yourself with a factor – if the debtor’s credit check is positive.
- In principle, you can also use a factor to protect yourself against difficult customers or because of bad experiences with some customers. This saves you time and money for your own tedious recovery measures.
Why should you use factoring?
It’s simple: factoring is a good solution for securing your finances. The main reason is your liquidity retention and the assumption of risk by a factor. This saves you from one or more payment defaults. Especially with customers who have high outstanding debts or customers with known poor payment behavior.
Who can use factoring?
Anyone can use factoring, it is only less common among service providers than in the trade and wholesalers. This is also because it is more difficult for them to find a factor.
Factoring is most often used in medium-sized companies. There are also industries that use factoring more often than others. The manufacturing industry makes use of this solution particularly frequently.