The term "factoring" refers to the ongoing sale of a company's receivables to a specialized financial service provider, known as the factor. The main objectives of factoring are to improve short-term liquidity, reduce credit default risk, and relieve the company’s accounts receivable management. The factor typically handles not only the financing but also receivables management and, in some cases, the del credere (bad debt) risk.
Receivables Recording and Management: Digitization and administration of invoices and open items relevant for factoring.
Debtor Credit Check: Automated creditworthiness check of customers (debtors) before transferring receivables to the factor.
Data Transmission to Factor: Interfaces for automated transfer of receivables data to factoring service providers.
Payment Monitoring: Tracking incoming payments made by the factor or directly by the debtor.
Reconciliation and Reporting: Reconciling payment flows with the factor and generating reports on liquidity development.
Risk Management: Analysis of defaults and monitoring of credit limits per debtor or industry sector.
Accounting and ERP Integration: Automatic posting of factoring transactions and integration with ERP or financial accounting systems.
A medium-sized machine manufacturer regularly sells its receivables to a factoring company to secure liquidity.
A trading company uses factoring software to automatically transmit open invoices to the factor and track incoming payments.
A start-up integrates a factoring service provider interface into its ERP system to sell receivables immediately after invoicing.
A company analyzes its customers' payment behavior using factoring software to minimize default risk.
A controller regularly generates cash flow reports based on factoring transactions.