If they are denied a bank loan or if such a loan is too expensive, factoring in many cases is a financing alternative used by an ever increasing number of small and medium-sized entities (SMEs). The factoring volume regarding SMEs amounted to about 1.7 billion Euros in the year 2006 which is approximately 30% more than in 2005. For 2007 the German Association for Factoring in SMEs (BFM) forecasts a factoring volume which for the first time will be exceeding 2 billion Euros.
The above association is an organization of factoring companies which offer SMEs having an annual turnover of between 250.000 and 10 million Euros to buy their receivables. In 2005 these factoring companies had about 1800 clients.
In particular small and medium-sized entities suffer from insufficient liquidity. Basel II exacerbates the problem given that lending becomes more and more restrictive. Therefore alternatives to the traditional ways of financing are gaining more and more importance in the strategic financial planning of small and medium-sized entities. One such alternative is factoring which means that companies cede their claims to a factoring company. The advantage: given that the “factor” in general remits at least 80% of the amount of the factored claims within 24 hours, this will put an end to the waiting for payments and discussions with banks. As soon as the factored invoices are settled the balance less a factoring fee will be transferred to the factoring client. Thus, there are various advantages to SMEs: they become more flexible financially, are able to quickly pay their purchase invoices and make use of discounts or re-invest. Moreover their credit facilities can be used for new business.
Information on factoring for SMEs is available online.