How does factoring help improve your balance sheet and credit rating?

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Factoring is a financing method whereby a company sells its receivables to a factoring company in order to receive faster payments and improve its liquidity.

By selling its receivables, a company receives immediate liquidity that it can use to pay its liabilities and strengthen its financial position. When a company receives payments more quickly, it can better control its operating costs and plan its finances more effectively. Of course, it can also obtain better purchasing conditions and discounts from suppliers.

Factoring can also help reduce the company’s credit risk, as the factoring company usually assumes the risk of collecting the receivables. This can help the company improve its balance sheet by converting its receivables into cash more quickly and making its receivables management more effective. In addition, factoring can help improve a company’s credit rating. If a company receives payments more quickly and pays its invoices on time, this can help it to be able to obtain more attractive loans and manage its finances better.

Another advantage of factoring is that it is a flexible financing instrument that can be adapted to the needs of the company. Financing with factoring is turnover-congruent, which means that more turnover equals more financing. Overall, factoring is a useful method of strengthening a company’s balance sheet. It helps to improve the company’s liquidity, reduce credit risk, improve the company’s credit rating and provide a flexible financing option.

Calculation example of how factoring improves the balance sheet of companies

As an example, we have shown a production company of medium size. Turnover range 15 – 20 million. Until now, financing has traditionally been based on banks and loans. The calculation basis for the rating corresponds to the recommendations of FINMA and is generally presented in this way by the banks.

General

It is striking that the company was able to increase turnover by almost 16%. Some financiers have followed suit, but at 2.83% not all by a long shot. The reason for this is the debt capacity, which has deteriorated by almost 10% despite the increase in turnover. This in turn has exacerbated the previously tight liquidity situation. From the perspective of banks and traditional financiers, no more loans are being granted here.

What does factoring change?

Factoring provides the liquidity that the company needs. This means that suppliers and creditors can be paid on time, even despite sales growth. This in turn leads to a reduction in external debt, a massive increase in liquidity and an improvement in cash flow. As a consequence, the rating with banks and credit institutions also improves massively. Investment credit and leasing or mortgages will be available at better conditions. In such a case, it would also be interesting to see how the ROE behaves, which is mainly of interest to the shareholders. In this case, the increase in ROE would be almost 12%.

See the example here: Factoring Example

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