The factoring institute assumes the customer’s accounts receivable by concluding a factoring contract with the factoring customer. In it, the factoring customer undertakes to sell his claims to the factoring institute and transfer them to him. In return, the factoring institute undertakes to buy and settle the receivables from the factoring customer. The contract regulates either the assumption of all demands or demands on certain customer groups. The contract usually refers to claims that arise after conclusion of the contract but also existing claims can be included.

A factoring agreement is a longer-term, the maturity is at least two years. In practice, even contract periods of four to five years are the rule.

Credit check and limit allocation

Before the conclusion of the factoring contract and during the entire contract period, the factoring institute checks the creditworthiness of the debtors at intervals. Based on the result of the audit, the factoring institute awards so-called purchase or customer limits up to the amount of which it bears the default risk of a debtor. For exposures exceeding the limit, the factoring customer bears the risk himself.

Purchase of receivables

The basis for the purchase of the receivables from the Receivables Institute is the customer’s invoice to the debtor. It first checks the invoice data and the invoice amount. The processing takes place in most cases by electronic means. The required invoice data are transmitted electronically to the factoring institute. This saves not only costs but also time. Regarding the factoring of receivables you will be able to have the best options now.

If the invoice amounts are within the limits of the respective debtor, the factoring institute buys the receivables. If not, the receivables are placed in a waiting position until a purchase is possible again due to payments received from the respective debtors.

Payment of the purchase price

The time of payment of the price of the purchased receivables depends on the contractual agreements between factoring institute and factoring customer. Mostly an immediate payment is agreed. The factoring institute will pay as soon as the invoice has been received and checked. It only takes longer for invoices for debtors who have not yet been credit-tested, because a check must first be made and a limit set.

The purchase price will be paid either by crediting the customer’s billing account or by transferring it to the customer’s account at the customer’s bank. The factoring institute retains 10 to 20 percent of the amount upon payment of the claim price in order to compensate for any discounts due to defects, complaints, discounts, returns, etc. This amount is called security deposit.

Upon settlement of the claim by the debtor or on maturity of the claim, the security deposit is either offset or paid to the factoring customers.

 

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