Factoring is a form of debtor financing. An entrepreneur transfers his invoicing and debtor risk to a specialized company, the factoring company. In return for compensation to this company, the entrepreneur immediately receives his money. He does not have to wait until his invoices have been paid.
This is the debtor portfolio outsourced to an external company; the factor. This factor can be limited to just financing the debtor portfolio, but the client can also choose to outsource the debtor management and collection to the factor, so that the entire debtor administration is taken over by the factor. The company that has transferred or sold the debtor portfolio to the factor usually receives a percentage of the turnover upon transfer to the factor (the sale amount minus a percentage for the factoring company in connection with costs and interest, but also a deduction to risk of default). This is called advance payment and averages between 80 and 90%. As soon as the debtor has paid, the company that has transferred its debtors will receive
The factor sets limits for each debtor within which the affiliated company can deliver. The standards are generally broader than with bank financing. For example, foreign debtors can often be included in the coverage without any problems.
In addition to financing debtors, the management of the debtor portfolio can also be transferred to the factoring company. This makes factoring of accounts receivable very suitable for growing companies, because the size of the financing grows with the size of the debtor portfolio. Factoring can be placed under the denominator of object loans, just like financial lease and real estate financing.