Factoring: Protection against Payment Default
Learn how to effectively protect yourself from payment defaults with factoring and secure your liquidity. nextsure offers tailored solutions.
Immediate liquidity
Risk minimisation
Debtor management
What exactly is bad debt in factoring?
Definition Credit Risk
Role of the Factor
Contractual Basis
Protective Mechanisms
The core causes of payment defaults and how factoring acts preventively
Bad debts pose a significant threat to companies, potentially diminishing liquidity and leading to insolvency. The causes are varied: debtor insolvency, disputed claims or external factors such as recessions. Factoring acts as a preventive measure by providing immediate liquidity through the sale of receivables and assuming the del credere risk (default risk in the event of debtor insolvency) with true factoring. A professional credit assessment of the buyers by the factor minimises risks in advance. Additionally, factoring relieves companies from debtor management, including dunning, freeing up resources and potentially improving payment morale. Thus, factoring becomes a comprehensive tool for risk minimisation and liquidity management.
Tailored Protection
Your Benefits with Factoring Default Protection
Risk transfer
Genuine protection against payment defaults.
Liquidity+
Immediate cash inflow upon invoice submission.
Credit check
Professional review of your receivables.
Dunning process
Outsourced, efficient dunning and debt collection.
Flexibility
Customisable solutions for your business.
Predictability
Stable financial planning despite uncertain times.
Growth
Financial resources for expansion and investments.
Relief
Focus on your core business.
Digital Focus
Modern, digital processing procedures.
Secure your liquidity and effectively minimize risks.
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Differences: True Factoring (Non-Recourse) vs. False Factoring (Recourse) in Case of Default
In true factoring (Non-Recourse), the factor buys your receivables and assumes the full risk of default (Delcredere risk) in the event of your debtor's insolvency, thus effectively protecting you. In contrast, with non-recourse factoring, the default risk remains with you. If a receivable defaults, you must repay the advance to the factor. Non-recourse factoring primarily serves financing and debtor management but does not offer final protection against default. The choice depends on your risk appetite and costs; for maximum protection, true factoring is the preferred first choice.
The Process: What happens when a client doesn't pay in factoring?
If a customer does not pay an assigned claim, the factor initiates dunning proceedings. In true factoring, in the event of proven insolvency of the debtor, the loss protection applies; the factor bears the loss. For disputed claims, protection may be delayed. In non-recourse factoring, the factor demands the advanced amount back from you, as the risk remains with you. Further action against the defaulting customer is then often back in your responsibility. Contract details are crucial here.
Factoring as a strategic tool for liquidity assurance and risk management
Factoring is a strategic tool for sustainable liquidity assurance and risk management. By selling receivables, tied-up capital is immediately converted into liquid assets, enhancing cash flow and creating financial flexibility for discounts, investments or seasonal adjustments. True factoring takes on the payment default risk, thereby minimizing default risks and ensuring predictability. The creditworthiness checks by the factor and the outsourcing of debtor management reduce risks and administrative effort, improve balance sheet ratios and strengthen the negotiating position. Companies can focus on their core business and seize growth opportunities.
Costs and Benefits: Is Factoring Worth It for Protection Against Default Risks?
The costs of factoring include a factoring fee (percentage of turnover), interest for the advance payment, and possibly a del credere fee for default protection. This is offset by significant benefits: minimizing the risk of default, immediate increase in liquidity, savings in accounts receivable management, and an improved balance sheet structure. To assess profitability, companies need to compare the factoring costs with the potential costs of defaults, alternative financing, and internal administrative effort. For many SMEs, the benefits of gained security and flexibility often outweigh the costs.
Credit insurance
Direct Protection
Business liability insurance
Corporate risks
Cyber Protection
Digital Threats
Requirements for businesses: When is factoring with default protection useful?
Factoring with default protection is suitable for B2B companies with a certain minimum annual turnover and valuable, undisputed receivables with typical payment terms (30-90 days). A good to moderate credit rating of the debtors is important. It is particularly useful for growing companies with high capital requirements, companies with demanding debtor management, exporters, businesses in industries with long payment terms or seasonal fluctuations, as well as companies looking to optimise their balance sheet structure. An individual assessment of suitability is recommended.
Alternative Solutions to Factoring: A Comparison of Credit Insurance and More
An alternative is trade credit insurance, which offers pure risk protection without financing or accounts receivable management. Bank loans provide liquidity but no risk protection. Internal accounts receivable management ties up resources and does not transfer risk. Forfaiting (export) or securitisation (large companies) are other options. The choice depends on whether primarily risk protection (credit insurance) or a comprehensive solution of financing, service, and protection (factoring) is sought.
The role of credit assessment in factoring to minimize defaults on receivables
The credit assessment of debtors by the factor is a key element for risk minimisation. Factoring companies utilise specialised expertise and extensive databases (credit agencies, payment experience pools) to analyse the creditworthiness of customers. They evaluate payment history, financial situation, industry, and economic environment. Based on this analysis, the factor sets individual limits and continuously monitors creditworthiness. If a negative development occurs, the limit can be adjusted or the purchase suspended, which proactively limits risk and contributes to the security of factoring.
What does the receivables default protection in factoring cover?
The future of receivables management is digital, fast, and data-driven. Digital factoring platforms enable fully digitised processes from application to payout. AI and machine learning optimise credit checks and risk assessments, identifying early warning indicators. Automated dunning processes, blockchain for transparency, and API interfaces to accounting systems become standard. This means easier access, faster liquidity, and dynamic risk management for companies. Default protection is further improved through more precise forecasts and individualised products.
