Procurement Glossary
Factoring in Procurement: financing instrument for optimized liquidity
November 19, 2025
Factoring in Procurement refers to the sale of receivables to a factoring company in order to improve liquidity and minimize default risks. This financing instrument enables companies to obtain immediate liquidity instead of waiting for incoming payments. Find out below what factoring in Procurement means, what methods exist and how you can make the most of the benefits.
Key Facts
- Immediate liquidity improvement through the sale of receivables to factoring companies
- Protection against bad debt losses by assuming the default risk
- Typical factoring costs are between 0.5% and 3% of the receivable amount
- Three main types: genuine, non-genuine and silent factoring
- Particularly advantageous for companies with longer payment terms
Contents
Definition: Factoring in Procurement
Factoring in Procurement is a financing instrument in which companies sell their receivables from customers to specialized financial service providers.
Basic mode of operation
Factoring comprises three main components: the financing function through immediate liquidity, the service function through debtor management and the del credere function through default protection. The factor takes over the receivables at a discount of typically 80-90% of the nominal value.
Factoring vs. traditional financing
In contrast to traditional loans, factoring is based on services already rendered and existing receivables. While bank loans often require extensive collateral, factoring is primarily based on the creditworthiness of the debtors. This makes it particularly attractive for growing companies with limited collateral.
Importance of factoring in Procurement
For procurement, factoring enables an improved negotiating position through increased liquidity. Companies can make better use of discounts and react more flexibly to market opportunities. In addition, the administrative effort involved in receivables management is significantly reduced.
Factoring methods and procedures
The implementation of factoring requires a systematic approach and the selection of the appropriate factoring variant.
Genuine vs. non-genuine factoring
With genuine factoring, the factor assumes the full default risk, whereas with non-genuine factoring, the risk remains with the company. Genuine factoring offers greater security, but is more expensive. The decision depends on the risk appetite and cost-benefit considerations.
Silent and open factoring
Silent factoring takes place without notifying the debtors, whereas with open factoring the customers are informed of the assignment. Open factoring is more transparent and cost-effective, but can affect customer relationships. The choice should take into account the customer structure and industry specifics.
Implementation process
The factoring process begins with a credit check of the debtor by the factor. Once the contract has been concluded, receivables are transferred on an ongoing basis and paid out immediately at an agreed percentage rate. The remaining amount follows after receipt of payment, less the factoring fees.
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Important KPIs for factoring
Measuring the success of factoring requires specific key figures to evaluate costs, benefits and efficiency.
Factoring cost ratio
The factoring cost ratio puts the total factoring costs in relation to the volume of receivables. Typical values are between 0.5% and 3% of turnover. This key figure enables a direct comparison with alternative forms of financing and an evaluation of the cost efficiency of different factor offers.
Liquidity improvement
The improvement in liquidity measures the reduction in the average collection period through factoring. A reduction from 45 to 2 days, for example, means a considerable cash flow optimization. This key figure should be offset against the financing costs saved and cash discounts utilized.
Default protection rate
In the case of genuine factoring, the default protection rate shows the proportion of receivables secured by the factor. A ratio of 100% means complete protection against bad debt losses. This key figure is particularly relevant for risk assessment and comparison with internal risk costs and value adjustments.
Risks, dependencies and countermeasures
Factoring involves specific risks that can be minimized by taking appropriate measures.
Cost risks and calculation errors
Factoring costs can affect profitability if they are not calculated correctly. In addition to the obvious factoring fees, there are often hidden costs due to minimum fees or additional services. A detailed cost analysis and comparison of different providers are essential for a well-founded decision.
Dependence on the factor
Too strong a commitment to a factor can limit flexibility and reduce negotiating power. Companies should maintain alternative sources of financing and conclude contracts with appropriate notice periods. Regular market observation helps to evaluate the conditions.
Reputational risks
Open factoring can put a strain on customer relationships if debtors interpret this as a sign of financial weakness. Transparent communication about the strategic advantages and professional processing by the factor can minimize these risks. Silent factoring offers an alternative here, but is more expensive.
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Practical example
A medium-sized mechanical engineering company with a 30-day payment term implements genuine factoring for 80% of its receivables. The factor pays out 85% of the receivable value immediately, the remaining 15% after receipt of payment less a 1.8% factoring fee. This gives the company immediate liquidity of EUR 680,000 with monthly receivables of EUR 800,000.
- Liquidity improvement: 25 days earlier availability
- Saved financing costs: 2,400 euros per month at 4.2% interest
- Full default protection for 80% of receivables
Current developments and effects
The factoring market is constantly evolving, driven by technological innovations and changing market conditions.
Digitalization and AI integration
Artificial intelligence is revolutionizing credit rating and risk assessment in factoring. Automated systems analyze large amounts of data in real time and enable faster decisions. This reduces processing times from days to hours and significantly improves the precision of risk assessment.
Supply Chain Finance Integration
Supply chain finance and reverse factoring are gaining in importance. These approaches integrate factoring into comprehensive financing solutions along the entire supply chain. Companies benefit from optimized cash flows and stronger supplier relationships.
Regulatory developments
New regulations such as Basel III are influencing the factoring landscape. Banks have to meet higher capital requirements, which makes alternative forms of financing such as factoring more attractive. At the same time, stricter compliance requirements are emerging for factoring companies.
Conclusion
Factoring in Procurement offers companies an effective way to optimize liquidity and minimize risk. The immediate availability of capital enables better negotiating positions and the use of discounts. With careful provider selection and transparent cost calculation, the benefits clearly outweigh the risks. Factoring is developing into a strategic financing instrument for modern procurement organizations.
FAQ
What does factoring in Procurement typically cost?
The costs for factoring are usually between 0.5% and 3% of the receivable amount, depending on the industry, debtor credit rating and type of factoring. Real factoring is more expensive than fake factoring, but offers complete default protection. Processing fees and minimum costs may also apply.
For which companies is factoring particularly suitable?
Factoring is particularly suitable for companies with longer payment terms, growing turnover or limited collateral for bank loans. Companies with many smaller receivables or high administrative costs in accounts receivable management also benefit considerably from this form of financing.
How does factoring differ from a bank loan?
Factoring is based on services already rendered and existing receivables, whereas bank loans often require extensive collateral. In factoring, the creditworthiness of the debtors is more important than the company's own creditworthiness. The factor also takes on administrative tasks in receivables management.
What are the risks of factoring?
The main risks are higher costs compared to other forms of financing, possible dependence on the factor and potential reputational risks in the event of open communication. Hidden costs and inflexible contract terms can affect profitability. Careful provider selection minimizes these risks.
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