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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
What is factoring in purchasing?
Factoring in purchasing refers to a form of financing in which a company assigns its liabilities to supplier management 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, risk management such as payment defaults can be reduced, resulting in a more stable supply chain.
Factoring in purchasing: from traditional payment processing to supply chain finance
Factoring in purchasing, as previously explained in theory, is a decisive lever for optimizing company finances in practice. In the face of increasing market volatility and rising liquidity requirements, companies are looking for effective methods to manage their cash flows. The transition from traditional payment methods to modern financing instruments such as factoring reflects the need to gain financial flexibility and increase competitiveness.
Old: Traditional payment processing
Traditional approach: In traditional purchase financing, companies settle their liabilities directly with suppliers within agreed payment terms, typically between 30 and 60 days. This process requires tight liquidity management, as high levels of capital are tied up. Companies are often reliant on short-term loans to meet their payment obligations, which leads to additional financing costs. In addition, the scope for negotiating better terms is limited, as suppliers are dependent on punctual payment and rarely grant longer payment terms. The resulting financial rigidity can hamper investment and growth.
New: Factoring in purchasing
Supply chain finance: Modern companies implement factoring in purchasing as part of their supply chain finance strategy. Here, the purchasing company assigns its liabilities to a factoring provider, which pays the invoices to the suppliers immediately. As a result, suppliers receive their payments immediately after invoicing, while the company benefits from extended payment terms of up to 120 days. This innovative form of financing uses digital platforms and automated processes to process transactions efficiently. The benefits include increased liquidity, reduced financing costs and improved relationships with suppliers. Companies can thus optimize their working capital and invest financial resources in strategic projects.
Practical example: Optimization of the financial structure in the electronics industry
A leading company in the electronics industry implemented factoring in purchasing to increase its liquidity and strengthen supplier relationships. Before the changeover, the average payment term was 45 days, which led to a high capital commitment of 10 million euros. By introducing Supply Chain Finance, the payment term was extended to 120 days. Immediate payment to suppliers improved their cash flow, allowing the company to negotiate price discounts of 3% on average. Within one year, capital commitment was reduced by 6 million euros. The freed-up funds were invested in research and development, which led to a 12% increase in turnover. This example shows how factoring in purchasing not only improves the financial situation, but also promotes the growth of a company.
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.
