Accounts receivable management
This includes debtor bookkeeping, regular credit checks, dunning, and collection services. Accounts receivable management frequently requires a lot of time and personnel costs for a company; taking the responsibility for accounts receivable management is part of the services offered by the factor.
Asset Backed Financing
This type of financing is based on the sale of the receivables of a company. It can be used to improve liquidity as well as providing protection against bad debts.
Asset Backed Securities (ABS)
With asset backed securities (ABS) financing, the receivables packages are sold to an especially created special purpose vehicle (SPV) which refinances the purchased receivables by issuing securities.
Short-term bank financing secured by assigning receivables to a credit institution. However, credit institutions normally accept domestic receivables only, and with high discounts.
Basel III (or the Third Basel Accord) is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010–11, and scheduled to be introduced from 2013 until 2018. The third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.
Basel III will require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (up from 4% in Basel II) of risk-weighted assets (RWA). Basel III also introduces additional capital buffers, (i) a mandatory capital conservation buffer of 2.5% and (ii) a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth. In addition, Basel III introduces a minimum 3% leverage ratio and two required liquidity ratios.
Clients of the factor
Mainly medium-sized companies from over 30 industries with industrial customers; these can include manufacturers, wholesalers, and service providers.
With closed factoring, the debtor is not informed that the receivable has been assigned; the assignment of the receivable remains invisible to the debtor.
Collection of receivables; collection services are part of accounts receivable management when factoring is used.
Obtaining credit insurance also serves the purpose of protecting you against the risk of bad debts. Unlike the factor, the insurance company does not assume one hundred percent of the risk. Credit insurance premiums can be eliminated through cooperation with a factor.
The creditworthiness of business partners; continuous monitoring of debtor creditworthiness is part of the services offered by the factor. It is one of the criteria used to calculate factoring fees.
Customer bookkeeping: Monitoring and recording payments, can be provided by the factor under a factoring contract.
Deutscher Factoring-Verband e.V. (German Factoring Registered Association)
Trade association to promote the business interests of the leading factoring institutions in Germany.
With disclosed factoring the debtor is informed regarding the assignement of receivables and future cooperation with the factor.
Part of accounts receivable management; can be provided by the factor.
Equity or funds similar to equity invested into private companies by investment companies. (private equity)
Key performance figure for balance sheet analysis, where equity is compared to total assets.
Eurofactor ABS Flex
Unlike classic ABS programs that place your securitized receivables packages on the capital market, Eurofactor ABS Flex is suitable for companies with a receivables volume of 10 million Euros and up. In addition, the central advantages of the flexible solution include much lower structuring costs, a much shorter implementation phase, greater flexibility during contract negotiations, and more flexible contract terms.
Export or import factoring
Factoring for cross-border goods and services transactions where companies (exporters, importers) utilize the services of a factor. The factor either handles the transactions directly, or uses a cooperation partner in the respective country.
Factoring is the purchase of short-term receivables resulting from the delivery of goods and services. Factoring is used for short-term sales financing and one hundred percent protection against bad debts.
Factoring with recourse
The factor is able to hold the factoring client liable if the debtor is unable to pay.
Factoring without recourse
The factor has no recourse against the customer, that is, the factor assumes the full risk of bad debts in case of default by the debtor.
Unlike credit financing with a fixed agreed credit limit, liquidity depends on the company's sales when factoring is used. Financing through factoring adapts to the increased liquidity requirements as sales rise (financing parallels sales). Therefore, fast sales growth does not result in liquidity gaps.
Forfaiting is a form of export financing where a financial institution purchases medium to longer-term export receivables.
Industrial, trading, and service companies from over 30 industries are taking advantage of factoring. Factoring customers also increasingly include companies that are mainly engaged in international transactions.
Permanent inability to meet financial obligations.
Factoring institutions frequently process international factoring transactions in cooperation with partners in the respective countries. There are two factoring cooperatives that operate globally: Factors Chain International (FCI) and International Factors Group (IFG).
Factoring for cross-border goods and services transactions; also called export or import factoring depending on the location of the factoring customer. The factor either handles the transactions directly, or uses a cooperation partner in the respective country.
Leasing is used to finance vehicles, machinery, and other mobile capital assets. The leased items remain the property of the lessor, while the lessee can use the items in exchange for regular lease payments.
Provided by the factor; fundamental economic requirement for solid success in business, frequently at risk due to high receivables levels.
A mixed form of financing consisting of fully liable equity capital and external financing using a loan, which is usually secured as first-class debt.
New insolvency system
The new insolvency system came into effect in Germany on 01/01/1999. It further restricts the security interests of banks and savings institutions for credit extended by them. Due to the special nature of the factoring business, receivables financing by factoring institutions is not affected by the new insolvency system.
In 1998, the Ottawa convention regarding international factoring came into force in Germany. Its contents go far beyond the factoring business, since it standardizes and simplifies the assignment of receivables for cross-border goods and services transactions in general, and therefore makes export financing easier.
Outsourcing individual business functions, economies of scale, utilization of specialized service providers; factoring makes it possible to outsource costly, personnel-intensive accounts receivable management.
Payments from the factor
The factor pays out up to 90 percent of the invoice amount when the invoice copies are submitted; the retention is credited or paid out at maturity under consideration of early payment discounts, rebates, and returns.
A type of equity capital that is provided as interim financing by an investment company.
Protection against bad debts
By purchasing the receivables, the factoring institution assumes the full risk of bad debts for domestic and cross-border business transactions. Advantages:
- Factoring covers up to 100 percent of the risk of bad debts.
- The factoring client receives the entire receivables amount no later than 120 days after the due date. The client does not have to deal with the collection of receivables.
Before offering loans, credit institutions prepare an individual creditworthiness analysis for every company; this is called a rating. It is an index that identifies the likelihood that the company will default on its obligations.
Used by the factor to reconcile rebates, early payment discounts, and possible deductions for deficiencies by debtors; it consists of 10 to 20 percent of the purchased receivables and is credited or paid out at maturity.
Important service provided by factoring; unlike credit insurance companies, the factor assumes up to one hundred percent of the risk without recourse; therefore the factor bears the full risk of bad debts in case of insolvency of a customer, without requiring any special proof.
Services provided by the factor
Includes all of accounts receivable management and other services, e.g. information regarding debtor payment habits.
Financing using venture capital is the participation in a company, for a limited period of time, by specialized companies or funds created for this purpose. Venture capital is frequently used for start-up financing of innovative companies or to finance the research and development process up to the development of prototypes.