Procurement Glossary
Factoring: financing instrument for optimized liquidity
November 19, 2025
Factoring is an important financing instrument in Procurement, whereby companies sell their receivables to specialized financial service providers. This method enables companies to improve their liquidity and reduce payment defaults. In procurement management, factoring plays a central role in optimizing payment flows and strengthening supplier relationships.
Key Facts
- Factoring enables the immediate sale of receivables in exchange for liquidity
- Three main forms: genuine, non-genuine and silent factoring
- Typical factoring fees are between 0.5% and 3% of the receivable amount
- Reduces the default risk and improves the balance sheet structure
- Particularly advantageous for SMEs with limited financing options
Contents
What is factoring? Definition and procedure of the process
Factoring refers to the sale of receivables to a factor who acquires them in return for immediate payment and assumes the default risk.
Basic types of factoring
In factoring, a distinction is made between different variants depending on risk assumption and transparency:
- Genuine factoring: Factor assumes full default risk
- Non-genuine factoring: default risk remains with the company
- Silent factoring: debtor is not informed of the sale of receivables
- Open factoring: debtor is informed of assignment
Factoring vs. traditional financing
In contrast to traditional loans, factoring is based on services already rendered. While bank loans often require extensive collateral, factoring is based on the creditworthiness of the debtors. This makes it particularly attractive for growing companies with limited collateral.
Importance of factoring in Procurement
In procurement management , factoring in Procurement supports the optimization of payment flows. Thanks to improved liquidity, companies can negotiate better conditions with suppliers and take advantage of discounts.
Process steps and responsibilities
The factoring process follows standardized steps from contract initiation to receivables processing.
Drafting factoring contracts
Contract negotiations include the definition of factoring limits, fee structures and services. Important parameters are the pre-financing ratio (usually 80-90%), factoring fees and interest rates for pre-financing.
- Determination of receivables eligible for factoring
- Definition of minimum and maximum amounts
- Agreement on the billing modalities
Operational receivables processing
Once the contract has been concluded, the ongoing transfer of receivables takes place via electronic data transfer. The factor checks the creditworthiness of the debtors and decides whether to accept the receivables. If accepted, the agreed percentage is paid out immediately.
Monitoring and accounts receivable management
The factor takes over the complete accounts receivable management including dunning and debt collection. This significantly reduces the burden on your own accounting department and professionalizes receivables processing. Regular reports provide information on the status of the assigned receivables.
Tacto Intelligence
Combines deep procurement knowledge with the most powerful AI agents for strong Procurement.
Important KPIs for factoring
Successful factoring programs require continuous monitoring of relevant key figures.
Financial performance indicators
The factoring ratio shows the share of factored receivables in total sales. Typical values are between 70-90% for established programs. The factoring cost ratio (total costs/factored amount) should remain below 3% in order to be economically viable.
Liquidity and cash flow metrics
The liquidity gain through factoring can be measured by the reduction in the accounts payable period. The average payment receipt period should be reduced from 30-45 days to 1-2 days. The working capital effect shows the funds released for operational purposes.
Risk and quality indicators
The default rate for factored receivables should be below 0.5%. The debtor structure analysis shows the distribution of risk among various customers. Regular credit ratings by the factor ensure continuous risk control and early warning signals.
Risks, dependencies and countermeasures
Factoring involves specific risks that can be minimized by taking appropriate measures.
Cost risks and fee structures
Factoring costs can have a negative impact on profitability if used improperly. In addition to the factoring fees, there is also interest for pre-financing and service fees. A detailed cost analysis is essential before concluding a contract.
- Comparison of different factor offers
- Consideration of hidden costs
- Regular review of conditions
Dependency risks on the factor
Being too closely tied to a factor can limit flexibility. Liquidity bottlenecks arise if the factor has problems or conditions deteriorate. Diversification through several factor partners or alternative sources of financing reduces this dependency.
Reputational risks with customers
Open factoring can send negative signals to customers regarding the financial situation. Professional communication and emphasizing strategic advantages help to avoid misunderstandings. Credit limit agreements with suppliers can provide additional security.
.avif)
Practical example
A medium-sized mechanical engineering company with annual sales of 50 million euros introduces factoring to secure growth financing. The company factors 80% of its receivables and immediately receives 85% of the invoice amount. With an average payment term of 40 days, liquidity improves by 4.5 million euros. The factoring costs of 1.8% are offset by interest saved on overdraft facilities and cash discounts taken.
- Liquidity improved by 4.5 million euros
- Reduction of payment defaults by 90%
- Relief of the accounting department by 2 full-time positions
Current developments and effects
The factoring market is constantly evolving due to digitalization and new forms of financing.
Digitization in factoring
Modern factoring platforms enable fully automated processes from the transfer of receivables to credit checks. AI-based systems analyze debtor risks in real time and optimize financing decisions. This significantly reduces processing times and cuts costs.
Supply Chain Finance Integration
Supply chain finance and reverse factoring extend traditional factoring approaches. Large companies finance their suppliers by settling invoices early in return for an interest advantage. This win-win situation strengthens the entire supply chain.
Regulatory developments
New EU directives on payment practices and Basel III regulations influence factoring conditions. Stricter capital requirements for banks are making factoring more attractive as an alternative source of financing. At the same time, compliance requirements for factoring companies are increasing.
Conclusion
Factoring is a proven financing instrument that offers companies immediate liquidity and protection against payment defaults. Digitalization makes factoring processes more efficient and cost-effective. For growing companies with a stable debtor structure, factoring is an attractive alternative to traditional forms of financing. A careful cost-benefit analysis and the selection of the right factoring partner are crucial for success.
FAQ
What does factoring cost for companies?
Factoring costs are made up of factoring fees (0.5-3% of turnover), interest for pre-financing (2-8% p.a.) and service fees. The total costs are typically between 1.5-4% of factored turnover, depending on the sector, debtor structure and contractual terms.
Which receivables are suitable for factoring?
Undisputed receivables from deliveries of goods or services to commercial customers are eligible for factoring. Receivables from private individuals, public clients or companies in crisis are usually excluded. The minimum receivable amount is often 500-1,000 euros.
How does factoring differ from a loan?
Factoring is not a loan, but a sale of receivables. It does not increase debt, but exchanges receivables for liquidity. The creditworthiness of the debtors is more important than your own creditworthiness. Factoring also offers protection against bad debt losses and debtor management services.
What advantages does factoring offer compared to other forms of financing?
Factoring offers immediate liquidity without collateral, protection against payment defaults and professional accounts receivable management. In contrast to loans, financing grows automatically with turnover. The balance sheet reduction improves key figures and creates space for additional financing.
.png)
.png)
.png)
