Factoring can prove to be an advantageous source of financing. It allows early conversion of the company's receivables into cash assets.
Recovery is handled by a bank or third party. The company sells or assigns all of a customer’s receivables to the factor (with or without the risk of defaulting). To do so, it receives an advance from the factor, improving cash assets, or a credit limit (proportionate to the total receivables assigned or sold).
In particular, factoring is suitable for young entrepreneurs with rapidly growing businesses who cannot or do not want to finance growing turnover with their own cash assets or with bank loans, and who would like to insure themselves against losses on debtors, domestically and overseas.
The bank or third party does not assume the risk or the costs associated with recovery free of charge. Thus, if the company’s annual turnover is at least CHF 1 million, the relatively high costs (fee on turnover of 0.5% to 2% usually) are justified.
In addition, the cost of factoring should not be higher than costs for managing debtors, managing arrears and recovery and any losses on debtors. In factoring (as in leasing), ordinary returns fall and the company’s income capitalization is thus reduced.
Factoring should not be confused with assignment (credit transfer). For assignment, debtors’ cash assets serve as collateral for a bank loan. The bank may (at any time) ask the customer to pay its invoices directly to the bank in question. Factoring however, consists more of outsourced recovery with the option of fixed methods.