Factoring is not only successful as a financing instrument for companies, but also as a strategic growth area for financial service providers. However, there are often weaknesses in processing in particular: manual checks, paper-based processes, cumbersome interfaces. If you want to remain competitive as a factoring provider, you need to digitalize your own processes end-to-end and offer your customers a convincing customer experience with simple handling and a high level of transparency.
Selected aspects relating to the potential digitalization of the factoring business are presented below; further reading includes the "Factoring Handbook", edited by Prof. Dr. Thomas Hartmann-Wendels, Patrick Juli, Eric Lehmann with contributions by Alexander M Moseschus and Magdalena Wessel, among others.
Onboarding
The factoring provider, usually a specialized factoring company, purchases receivables with or without recourse, open or undisclosed, from a company, the onboarding customer, which in turn maintains business relationships with its customers and realizes its sales with them. The factoring company offers the affiliated customer pre-financing of its customer receivables, individually or in total, often with a financing framework for different terms or payment targets. The credit risks to be assumed for factoring financing must be assessed for each new customer during the onboarding process. Even if this process is determined by a classic credit check (and also has to assess the respective customer portfolio), there are many possibilities for digitalization (when submitting customer documents and in the subsequent communication with the follow-up customer), automation in the credit assessment (through interfaces to various credit bureaus such as Creditreform, Schufa or other national and international providers) and increasingly general research on the follow-up customers (with the use of artificial intelligence).
Ideally, the result of onboarding is a framework limit that determines the scope (and possibly the quality through additional conditions) of the business to be submitted by the connecting customer.
The factoring process: step by step
The further course of a factoring transaction is a "triangular relationship" between the factoring company (factor), the subsequent customer (company with factoring) and its customer (debtor).
Financing via factoring always provides the best financial and administrative relief for the affiliated customer if the financing processes are seamlessly integrated into the existing business processes.
After onboarding, the affiliated customer submits its claim(s) against its customer(s) (individually, in full or in part) to the factoring company. This should already be fully digital - using a customer portal, with flexible upload functionality (upload of documents, e.g. an invoice that is then read out via OCR or lists of a receivables portfolio) and supplemented by digital options for customer communication (e.g. subsequent request/correction of submission data or information on the underlying transaction).
The factoring company also checks the creditworthiness of the debtors (except in the low-risk small ticket business, if applicable). This credit check is a central component of the factoring process in order to reduce the risk of subsequent (return) payment defaults. If the subsequent customer has a free limit and the creditworthiness of its debtors corresponds to the factoring company's risk and purchasing policy, the receivables are purchased (on the basis of automated checks). The factoring company pays the invoice amount less an agreed fee, which depends on the factoring company's performance, and, if applicable, a further discount within the period agreed with the connecting customer. - The subsequent customer receives the remaining amount after its customer (debtor) has paid the invoice in full.
Another important pillar of factoring is debtor management. The factoring provider monitors incoming payments - if agreed with its affiliated customer - and takes care of dunning and, if necessary, debt collection. The follow-up customer is relieved of administrative work and the factoring provider also assumes the risk of bad debt losses from the debtors (for a fee that depends on the quality of the customer portfolio).
In addition to the rapid provision of liquidity, companies benefit from a high degree of transparency. Via a digital platform, the factoring provider's portal, the status of the receivables submitted (purchased / not purchased), incoming payments and the current free limit can ideally be viewed in real time. This not only makes financial planning easier for the company using factoring, but also helps it to react to changes at short notice.
However, this efficiency is only possible if the entire process chain is digitized without media discontinuity - end-to-end with the appropriate interfaces.
Media disruptions cost time and harbor risks
For many factoring providers, customer applications are still processed in diverse, fragmented system landscapes. The consequences: Media disruptions, inconsistent data and manual reworking. Central processes are particularly affected, such as checking
- of receivables and any associated contracts - often the "bottle neck": the receivables to be submitted in rigid formats do not correspond to the specifications or are incorrect, documents have to be requested, cannot be read out automatically, checked and approved in order to subsequently release the receivables for payment. Communication with the subsequent customer takes place by email, is time-consuming and must always be assigned to the correct process.
- of the debtors: Information is merged manually from various sources. This takes time and increases the risk of incorrect decisions.
- Incoming payments: These are not automatically assigned to the outstanding receivable and supported in further processing, especially if the payment amount does not correspond to the expected repayment amount.
- Limits and risk analysis: These are often carried out on the basis of manual reconciliations of incoming payments, the factoring sub-ledger and the factoring company's general ledger and are not made transparent by dashboards and comprehensive (reporting) evaluations that may support automated decision-making logic (especially in the event of changes in the (payment) behavior of debtors).
End-to-end workflows create efficiency
The key lies in end-to-end digitization. Real efficiency potential can only be leveraged if all steps - from the submission of the claim to verification and payment - are interlinked without media discontinuity.
This is exactly where the NAVAX solution comes in: HENRI for factoring maps all key factoring processes digitally from end to end:
- Simple onboarding: system-supported setup of new follow-up customers, enabling a quick start to the business relationship.
- Flexible submissions with plausibility checks: suitably submitted receivables can be purchased automatically; otherwise there are various options for data corrections (by the connecting customer) or options for uploading further documents, possibly with readout via OCR and subsequent data transfer.
- Automated checks and approvals: Debtor, limit and creditworthiness checks are carried out on the basis of stored rules and, increasingly, AI-supported analyses.
- Optimum transparency: Real-time overviews thanks to a standardized data (bank) basis, whether for internal processing or information to the connecting customer via "his" portal.
- Customizable workflows: Everyone involved works in one system - with clear tasks, status displays and digital approvals.
Less effort, more speed - for customers and teams
Process digitization not only shortens the processing time from submission to payment, but also noticeably reduces the internal workload. Teams are relieved and decisions are more informed. Optimal support and guidance through the necessary work steps can be provided, as can the use of a "fast lane" for the professional internally.
Particularly in times of a shortage of skilled workers and increasing expectations of subsequent customers in terms of speed, transparency and compliance, this is not a "nice to have", but a real competitive advantage.
Conclusion
If you want to make factoring fit for the future, you have to think digitally - end-to-end. With end-to-end workflows, automated checks and intelligent software, factoring providers can make the leap from an analog burden to a digital service.
NAVAX supports you with experience, technology and a system that is constantly evolving and thinking along with you.
Curious to find out more?
Find out more about our HENRI solution for factoring and how you can use it to make your processes efficient, scalable and future-proof.
