Procurement Glossary
Factoring in Procurement: definition and important aspects for procurement specialists
Factoring enables companies to improve their liquidity and minimize risks through the sale of receivables. This overview shows you how Procurement can use factoring strategically and thus actively shape the financial performance of the company.
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 Procurement , this offers the opportunity to offer suppliers better conditions through faster payments without burdening its own liquidity.
Example: A medium-sized company sells receivables amounting to 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%.
Factoring in procurement
Factoring in Procurement is an innovative financing instrument that is becoming increasingly important in modern business management. It is a form of financing in which supplier invoices are pre-financed by an external service provider (factor). This method enables companies to optimize their liquidity and at the same time strengthen their relationships with their suppliers. In this guide, we will shed light on the various aspects of factoring in Procurement , from the basic concepts and practical implementation to the advantages and disadvantages of this form of financing. Especially in the context of increasing digitalization and global supply chains, the topic is becoming even more relevant for modern companies.
What is factoring in Procurement?
Factoring in Procurement 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 Procurement
Factoring offers considerable advantages in Procurement . 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 Procurement: from traditional payment processing to supply chain finance
Factoring in Procurement, 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 Procurement
Supply chain finance: Modern companies implement factoring in Procurement 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 Procurement 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 Procurement not only improves the financial situation, but also promotes the growth of a company.
Conclusion on supplier financing through factoring
Factoring in Procurement 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 continue to gain in importance in Procurement .
