Questions and answers on the subject of factoring in the skilled trades sector:
Can any receivable be factored?
No. In principle, neither the type of customer nor the outstanding invoice play a role. However, some providers only accept receivables when they exceed a minimum amount. Then it is more worthwhile than with many smaller invoices.
When is factoring most worthwhile?
If you, as a craftsman, need or want more incoming payments quickly. Factoring can always be useful when financial bottlenecks are imminent.
When is factoring excluded?
In principle, all receivables are suitable for factoring. However, service providers often refuse to purchase receivables that are associated with rights of return. This also applies to the trades: not every provider purchases this type of receivable. After all, there may be disputes with the clientele in the course of final acceptance.
If customers' payment behavior leaves much to be desired - especially in the case of large Jobs - even companies that were previously financially sound can find themselves in financial difficulties. For this reason, many businesses now rely on specialist providers to take over outstanding receivables on their behalf. The factoring provider pays out part or all of the invoice in advance.
For its services, the factor receives a portion of the invoice amount. This difference is the profit of the factoring company and also covers its risk.
The biggest advantage from factoring is that the outstanding amount is paid directly into the company account. With these additional funds, you can pay your own invoices faster. You may then be able to enjoy cash discounts: Saving money, in other words. Factoring ultimately also protects you from having to cope with a complete loss of payment in the event of insolvency on the part of the principals.
If you assign many receivables to the factoring company, you may save time. You don't need to worry about monitoring incoming payments and save yourself the work of dunning.
You also increase your independence from banks because you know exactly when you will receive the money from your factoring provider.
The major disadvantage of factoring is that the service providers demand a portion of the outstanding receivable for their services. Depending on what is agreed, the Tradesmen and women therefore do not receive the full amount from the invoice, or have to pay a percentage share from the invoice total.
Thus, factoring also influences the calculation of the hourly rate and should be considered as a cost block. After all, liquidity is of no use if an Job is no longer profitable.
Factoring and receivables management are a highly individual business model, and the various offers and services they contain are correspondingly diverse. Nevertheless, factoring services can be roughly subdivided. This begins with communication to the customer:
- Silent factoring: This is called so because you continue to act as the sender(s) of the invoice and handle the communication with the clientele. The sale of receivables is therefore not obvious to the payers.
- Open factoring: Open factoring comes in different varieties. These range from a simple reference on the invoice to a different account holder (namely the factor) to an invoice with the provider's logo. The invoice of the craftsman's business is then only included as an attachment. With this type of invoice, the factor often also takes care of the unattractive measures, such as issuing reminders or commissioning collection services.
Many Tradesmen and women shy away from the step to open factoring because they are unsure about the external effect. It is important to them that the clientele only deals with them, even when it comes to invoicing.
In fact, the decision to use open factoring is not an easy one. Long-time customers may find it surprising or even cause speculation as to the creditworthiness of the business. On the other hand, those who have just set up their own business could opt for open factoring right from the start and communicate this openly.
Another difference between providers and their solutions is the way risk is borne.
- Genuine factoring: In this case, the factor assumes the default risk of the payment in full. If payment is not received, the factor will exhaust all legal remedies to obtain the money. In return, the company retains more of the invoice amount. A payment to the crafts company of between 80 and 90 percent of the invoice amount is quite common.
- Non-genuine factoring: Here, the invoice goes back to the company if there are problems with payment.
Non-genuine factoring can be a good tool if you do not have to deal with a lot of non-payments, but you want to give the clientele longer periods to pay. The factor thus pre-finances the receivable.
Factoring becomes somewhat more complicated in the case of services that are to be invoiced in accordance with the German Construction Contract Procedures (VOB). It is in the nature of things that customers initially pay only partial invoices. And in the end, the final acceptance of the services must take place before the final invoice is issued. Even if the greatest care is taken, it cannot be ruled out that the client will report defects.
However, from the point of view of factoring companies, this is a risk. That's why there are only a few companies that dare to tackle this topic.
The decision for a suitable factoring partner should not be made hastily, as there are a number of criteria to consider:
- The company must offer services to trade businesses in the first place. This is by no means the case with all of them, as some factoring service providers avoid business with many smaller invoices or the industry in general.
- The question must be clarified as to whether VOB services can also be prefinanced. Of course, this is only relevant if these forms of billing occur frequently.
- How serious is the factoring provider? How long has it been on the market? Are there any negative comments online about the business conduct?
- And of course, the fees and maximum financing amounts also play a role. After all, passing on the receivables should pay off in the end.
Don't shy away from factoring
The partial or complete sale of receivables can be a sensible instrument for corporate management from the point of view of a craft business. After all, this is how you secure liquidity. However, before deciding on a provider, you should carefully examine and calculate its services.
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The information in this article does not constitute legal advice. Despite careful research, we cannot guarantee completeness, accuracy and timeliness for legal information. If you need legal help, please contact a lawyer.
