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Factoring in purchasing: definition and important aspects for purchasing specialists
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Factoring in a nutshell:
Factoring is a form of financing in which a company sells its receivables from customers to a factor (usually a bank or financial services provider) and immediately receives a large part of the invoice amount in return. For purchasing departments, this offers the opportunity to offer suppliers better conditions through faster payments without burdening their own liquidity.
Example: A medium-sized company sells receivables of EUR 100,000 to a factor, receives 90% (EUR 90,000) of this immediately and pays a fee of 2%, whereby the supplier receives payment immediately and grants a discount of 3%.
Contents
Factoring in purchasing
What is factoring in purchasing?
Factoring in purchasing refers to a form of financing in which a company assigns its liabilities to suppliers to a factoring company (the factor). The factor pays the invoices to the suppliers immediately or within a short period of time and grants the purchasing company an extended payment term. This allows the company to improve its liquidity, while the suppliers receive their money more quickly, resulting in a win-win situation.
Core elements of purchasing factoring
Significance for purchasing
Factoring offers considerable advantages in purchasing. It improves financial flexibility and enables companies to react better to market changes. By paying suppliers immediately, business relationships are strengthened and potential cash discounts are utilized. In addition, risks such as payment defaults can be reduced, resulting in a more stable supply chain.
Use of factoring in purchasing
By using factoring, companies can extend their payment terms and at the same time enable their suppliers to make quick payments. This improves liquidity and strengthens business relationships with suppliers.
Calculation example
Initial situation:
A company has an invoice from a supplier for €200,000 with a payment term of 30 days. The company would like to use factoring to extend its payment term to 90 days.
Factoring costs:
The factoring company charges a fee of 1.5% of the invoice amount per month.
Calculation of fees:
- Extended payment term: 90 days - 30 days = 60 additional days
- Monthly fee: € 200,000 x 1.5 % = € 3,000 per month
- Total fees for 60 days: (60 days / 30 days) x € 3,000 = € 6,000
Advantages for the company:
- Liquidity gain: The company can use the funds freed up for other investments or to cover running costs.
- Supplier loyalty: The supplier receives his money immediately and is more willing to grant better conditions or discounts.
- Cash discount utilization: Possible cash discounts can be utilized despite extended payment terms.
Practical implementation:
Today, a purchasing manager can contact a factoring company to negotiate the terms and integrate factoring into the procurement processes.
Evaluation and strategic findings on factoring in purchasing
✓ Critical success factors
→ Process integration: Smooth integration of factoring into existing purchasing and payment processes
→ Supplier management: transparent communication with suppliers via the factoring model
→ Cost efficiency: optimal ratio between factoring fees and savings achieved through improved conditions
⚠ Challenges and limitations
→ Complexity: elaborate contract design and coordination with various stakeholders
→ Cost structure: Precise analysis of factoring costs in relation to alternative forms of financing
→ Supplier acceptance: Not all suppliers are familiar with factoring models or accept them
Future trends and developments:
"The digitalization of factoring will lead to faster, more flexible and more cost-effective solutions."
→ Blockchain-based factoring solutions
→ Dynamic price models based on real-time data
→ Integration of AI for automated credit checks
→ Supply chain finance platforms with factoring components
◆ Strategic implications
→ Working capital optimization: systematic use of factoring to improve the liquidity situation
→ Supplier relationships: Use as a strategic tool to strengthen the partnership
→ Risk management: factoring as part of a diversified financing strategy in purchasing
Conclusion on supplier financing through factoring
Factoring in purchasing has proven to be an effective financing instrument that both improves the liquidity of the purchasing company and strengthens supplier relationships. Despite the associated costs and complexity, the strategic advantages such as extended payment terms, optimized working capital and reduced default risks outweigh the disadvantages. As digitalization progresses and new technological solutions emerge, factoring will become even more important in purchasing.
