Classic factoring

Factoring is a type of company financing that does not only originate in the United States, but from the Templar Knights of the 12th century. It only gained in significance in Germany in the sixties. The objective of factoring is liquidity financing combined with a cutting of the balance as well as an assurance against non-payment of claims instead of a commercial credit insurance. Full service factoring often also includes the fulfilment of services rendered by accounts receivable management.

The factoring company (it does not have to be a factoring bank) purchases its clients’ claims after submitting a copy of the invoice (or submitting it electronically) and credits them to the invoice amount. Usually, 10 per cent of the claimed amount is retained for reasons of set-off (bonuses, discounts, currency code of the debtors) until the actual payment by the debtors. The factor takes over the risk of non-payment at any rate (del credere risk) and thus also plays the role of a credit insurance – often even much more.

Previously, the factor was almost always the subsidiary of a bank or had a direct bank status. Since the KWG (Kreditwesengesetz = Law of credit system) limits flexibility too much and increases the price of factoring unnecessarily, the trend is towards factoring companies similar to banks without a bank status. Here we differentiate between

• Factoring companies with a bank background as shareholders
• Factoring companies with insurance or investment companies as shareholders
• Factoring companies with strong private investors as shareholders.

More important than the shareholder background is the quality of the employees, the legally founded contract system, the re-financing structure, possibilities to re-insure, the technology and the ability to provide technical services s well as the ability, to assist and support connected customers from the start in their daily business.

Objectives of factoring:
Usually clients are relieved of their short term liabilities with the liquidity gained and thus can cut their balance. Factors finance themselves through a turnover fee, on the one hand, and through interest, on the other, which have to be paid by the client until payment of the invoice amount by the garnishee. There are other fee models in practice.
Factors basically do not purchase every claim, but check on garnishees for creditworthiness and limit themselves, in the case of negative results, to the pure encashment of the invoice amount. The risks of factors consist in the debtors’ risks, the connected customers’ risk, the viability of claims and in their own work processes. The better factors organize their own work processes internally, the lower the risks and thus the factoring costs.

Service function:
The factor fulfils service functions through accounts receivable accounting, dunning and collection activities and advisory services.

Financing function:
This function is fulfilled by granting of credit. There are various influencing factors on the amount of financing such as the limit for quantifying the subscription, the amount held or dealing with §13c of the Tax Reform Act.

Del credere function:
The del credere function is the liability of a creditor for loss of a claim, which occurs when a debtor is unable to pay. The del credere providers (factors) commit themselves towards the connected customers that debtors will fulfil their financial obligations from the business concluded, by taking over 10  percent del credere protection within the scope of previously examined limits. The del credere function clearly goes beyond the services of a credit insurance, but can be combined with a commercial credit insurance. We then make special adaptations. 
In practice, the risks arising out of del credere are assumed by factoring companies, credit insurers and by some centrally regulated purchasing companies (also called “del credere companies“) in particular. The pre-requisites for taking over the risk of non-payment are a detailed analysis of the creditworthiness of the debtor on the part of the del credere providers.

Forms of factoring depending on the scope of services

• Proper Factoring / improper Factoring (non-recourse/recourse):
• “Proper” factoring is a process where factors take over the del credere risk. Proper factoring has been practised in Germany without exception for years.
• On the other hand, factoring without assuming risk of non-payment is described as “improper factoring.”
• Maturity factoring is a factoring variant where the factoring customer makes use of the advantages of complete risk protection and the relieving of accounts receivable management but rejects immediate regulation of the purchase price.
• Bull factoring or in-house factoring. Factors do assume the del credere risk and the financing, but no further service functions. Accounts receivable accounting remains the job of the customer.

Factoring depending on the type of transfer of claims

• Open factoring (Notification Factoring): in the case of open factoring, the debtor is informed of the transfer of claims and requested to pay directly to the factor.
• Silent factoring: in the case of silent factoring, debtors are not informed of the transfer of claims. It remains invisible to them.

Factoring depending on the type of claim selection

• Domestic factoring: only the domestic claims are sold to the factor.
• Export factoring: services are only rendered to debtors abroad and sold to the factor.
• Selective factoring: some of the debtors in Germany or abroad are tendered to the factor for purchase.
• Import factoring: the creditors’ claims against themselves are tendered and sold in reverse factoring or also import factoring to the factor.
• In-and-out factoring: a completely new factoring variant, designed out of the combination of purchase factoring and sales. This is a product innovation.

There are presently a total of more than 100 established factoring institutes in Germany, some of them limited as niche providers to companies with a small turnover. Others work exclusively in imports and exports and others, again, depict the entire range of factoring solutions, but are less flexible and have an individualistic approach.

HANSEKONTOR selects the suitable factoring partner for you based on your specific wishes and requirements. We analyse your claim structure in detail and your present accounts receivable management, to find the suitable factoring process. We compare the factoring concept with alternative forms of financing and look for the best alternative for you. After finalising a factoring contract, we will assist you in the start phase of implementing the factoring system in particular, i.e. training of employees, EDP connection, etc.

Advantages for the client:

• Relief from short term credit lines at banks. Better possibilities of medium and long term financing
• Acquiring additional discounts
• Liquidity financing
• Protection of classic credit securities
• Granting payment objectives to the buyers
• 100 percent del credere protection
• Choice of taking over accounts receivable management
• Execution of dunning and collection activities
• Possibility to combine purchase, import and reverse factoring

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