Small and medium-sized enterprises (SMEs) can increase their liquidity through a bank loan, overdraft or factoring. A bank loan means long negotiations with a bank for the applicant. A bank overdraft is often very expensive, especially if the account holder overdraws the granted credit line. As a quick and favorable promotion of liquidity, therefore, more and more companies use factoring. Numerous providers have SME factoring in the program by continuously buying outstanding receivables.

For factoring, the vendor receives 80% – 90% of the invoice amount within a few working days. The remainder minus fees will be paid by the factor at the due date of the payment. In addition to low costs, SMEs benefit from several other advantages of this up-to-date form of financing:

Financing function

Financing for small businesses often difficult

Small and medium-sized enterprises often struggle to obtain bank credit or convince other lenders to invest in the firm. Other issues are experienced by customers who have a long payment term or do not pay on time when due. In the worst case, there is a bad debt that can drive the company into ruin. Here, factoring for small businesses to promote liquidity offers.

Advantages of factoring for medium-sized companies and small companies

Liquidity is an important factor for small businesses. Even the default of fewer customers can bring small and medium-sized businesses into financial difficulties. Factoring gives SMEs more security and can save costs. The number of outstanding claims is reduced and the company benefits from a balance sheet reduction. As a result, the credit rating, equity ratio and rating of small companies increase in discussions with suppliers, banks and other business partners. The accounts receivable factoring process is important there.

Protection against Bad Debts and Relief Of Bookkeeping

If the factor assumes the function in addition to the financing function, the creditor no longer has to fear a bad debt loss.

Another service function of factoring is the monitoring of timely payments. In the event of late payment, the factor also takes over dunning and collection. This relieves the creditors’ claims management, which saves staff, time and money and allows them to focus on their core business.

Factoring Fees Often Lower Than Current Account Credit

As a rule, the factoring fees amount to between 1% and 2% of the sold receivable. The amount of the fee depends on the volume of receivables, the payment terms granted and the creditworthiness of companies and end customers.

For a flat-rate calculation example with a claim amount of $ 20,000.00, factoring fees between $ 200.00 and $ 400.00 would have to be expected. The interest on current account overdrafts regularly amounts to an average of 10%, whereby costs and tolerated overdrafts still need to be added. Depending on the intensity of use and its useful life factoring is therefore also a favorable financing alternative from an economic point of view.

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