Usual Options for the Proper Invoice Factoring

An example often says more than many pages of complex explanations. So also with the topic factoring because what in theory often seems complex and intellectual, ultimately proves to be extremely simple and straightforward. With a simple factoring example calculation we want to show you how factoring can make a tangible difference for you and your company.

What is factoring

But before we present a factoring example for you, let’s first briefly discuss what factoring actually is. Although it has been a tried and tested instrument for millennia and continues to enjoy greater popularity, very few people can imagine anything about it.

Factoring means that a specialized financial service provider (factor) “buys” certain receivables and pays out their value at short notice. The advantages of factoring are obvious: With factoring, you can quickly obtain valuable liquid funds that you can use either to pay for deliveries, to build up reserves or for investment projects. Although a factoring fee is due, the method is often cost-neutral: exploiting discounts made possible by this is just one example of how factoring can optimize your business processes. The invoice factoring companies are there also.

Factoring: example bill

What does factoring look like in practice? By way of example, let us briefly explain this. Suppose you have outstanding invoices worth a total of 30,000 dollars. If you now contact a factor, for example because you need money to buy a new machine, it will first check which of the receivables are eligible for a takeover. If your debtor is a company with a very poor credit rating, it will make the acquisition virtually impossible. Even if a debt collection company has already been activated, this means an exclusion criterion in terms of factoring.

The following factoring criteria apply:

  • Your customer or bill recipient is a company
  • The claim is not yet due and undisputed
  • The delivery or service is fully rendered
  • The creditworthiness of your customer is good

Back to the factoring example

Let’s assume that the factor can take over claims totaling 10,000 dollars. After the conclusion of the factoring agreement, in which you settle the details of the transaction, you will now receive the full amount, minus a factoring fee.

How much is this factoring fee?

It depends in practice on a variety of factors. If we assume for our factoring example that it amounts to 1%, then this means that the sum of 9,900dollars will be credited to you.

Of course, you have to decide for yourself what points are important to you on the list and if you are willing to pay a higher fee for a lower risk. So, be aware of what you expect from factoring and what problems the factoring company should solve for you. Then nothing stands in the way of a good cooperation with the factor.

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