What does SME factoring mean?
Factoring refers to the sale of receivables by companies in order to ensure liquidity. Receivables can accumulate if a company has provided a service but the customer does not pay. SME factoring is factoring that is carried out by small and medium-sized companies. In addition to increasing liquidity, factoring also enables SMEs to take advantage of cash discounts, improve their credit rating and repay their own liabilities more quickly. A side effect is the strengthening of the SME vis-à-vis suppliers and banks. Factoring is therefore an alternative to a bank loan. Factoring also relieves the burden on internal accounting.
How does SME factoring work?
Buyers of receivables (= factoring providers) are, for example, financial service providers with high financial capacities. They purchase the receivables and, depending on the factoring agreement, assume the del credere risk, i.e. the risk of non-payment. As a rule, 80-90% of the receivable amount is paid directly to the company. The factoring provider usually charges a fee for this service.
There are different types of factoring:
- In-house factoring: The accounts receivable management remains with the SME.
- Full service factoring: The factoring provider also takes over the accounts receivable management.
- Open factoring: The company's customers are informed about the sale of the receivable.
- Silent factoring: The debtors are not informed about the factoring.
- Genuine factoring: The factoring provider also assumes the del credere risk.
- Non-genuine factoring: The del credere risk remains with the company.
How widespread is SME factoring in Germany?
SME factoring is still only used by a small number of companies. According to a study conducted by the German SME Factoring Association in 2017, 75% of decision-makers in companies are not familiar with the principles and opportunities of factoring, although 53% are interested in alternative options for flexible sales financing.
Further information:
https://www.unternehmenswelt.de/factoring-effektives-forderungsmanagement-fuer-kmu
https://fincompare.de/finanzmagazin/kmu-factoring
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