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Optimizing Handling Of Factoring Transactions

23-04-2021 5 min read

Optimizing Handling Of Factoring Transactions

“Factoring” means that a company sells customer receivables for goods and services deliveries to a factoring institution on an ongoing basis. Doing this gives the company immediate liquidity from its receivables. The factor checks the buyer’s creditworthiness prior to conclusion of the contract and on an ongoing basis, and assumes full risk of loss within an agreed limit. This form of financing increases practically automatically as a company’s sales revenues increase, which is why industry professionals think of factoring as a method of financing “congruently with turnover”. But factoring is far more than just a form of corporate financing: Besides immediately converting receivables into liquidity, factoring offers comprehensive protection against payment defaults; if desired, factoring institutions can also handle receivables management for customers, including dunning and debt collection.

The Positive Effects Of Factoring

  • Trades high outstanding claims for immediately available cash flow, which facilitates company growth
  • Allows reliable, secure financial planning (financing that is "congruent with turnover"/"grows with the company")
  • Provides greater financial flexibility
  • Enables companies to grant debtors extended payment terms
  • Increases equity ratio
  • Optimizes balance sheet structure, resulting in better rating
  • Provides security by protecting against payment defaults, since the factor assumes the risk of debtor failure
  • Eases burden of receivables management
  • Allows factoring customers to take advantage of numerous rebates, bonuses, and discounts ("cash payer benefits")
  • Opens up opportunities to expand into foreign markets

Significant Advantages, Complicated Handling

Factoring’s advantages (quick availability of liquidity, better balance-sheet figures) come at the price of a significantly increased administrative burden. In practice, handling factoring transactions poses major challenges to companies. It is important that the factoring agreement, including all of its individual conditions, be mapped out in SAP’s posting data. Claims need to be identified and delivered to the factor on the basis of this contract. The company needs to keep clear records of the factor’s decisions on which claims to buy, along with any related documentation; the same goes for any receivables rejected, or perhaps bought back by the company. And, not least, all of these transactions need to be posted to SAP. Up-to-date, meaningful analyses of factored claims are scarcely possible, or can only be created with great effort. Any related activities are usually done manually and organizationally, which creates considerable administrative expenses and can also be a source of error.

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