Glossary

Assumption of risk

Important service as part of factoring; the factor assumes the risk up to one hundred percent without recourse in contrast with the commercial credit insurance. They therefore bear the full risk of bad debt given the insolvency of the receiver without special proof (assumed del credere case). Del credere.

Basel II

According to the so-called Basel recommendations (Basel II), banks will be held accountable for the risk underlying each individual credit management transaction for the provision of equity in the future. This will lead to the issuance of credit to medium-sized businesses becoming more expensive than ever before.

Basel III

After the introduction of Basel I in 1988 as well as the significant revision of Basel II, which was introduced in 2007, material modifications resulted from 2013, which were established under Basel III. Basel III includes recommendation for the stabilization of the financial world. This includes increasing the minimum equity requirements and the introduction of capital reserves demanded of Banks.

Benefits of factoring

Improved liquidity through the reduction of outstanding balances, savings for purchases through cash discounts and rebates, up to one hundred percent security against failures to make payments, ongoing debtor credit checks, disappearance of the costs for commercial credit insurance, additional improvement of the balance structure, improvement of the standing with banks and suppliers.

Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)

BaFin (the German federal financial supervisory authority) is the oversight committee responsible for federal oversight of the financial services companies including factoring and leasing companies. Since Dec. 25 2008, factoring has been defined as a financial service requiring permits and oversight in the Kreditwesensgesetz (German credit services act, aka KWG) and regulated more closely (cp. §1 1a p. 2 Clause 9 of the KWG.

Claims

Outstanding balances from the delivery of goods and services. Without the benefit of factoring, they are connected with a risk of bad debt for the supplier until final payment. The supplier gains immediate liquidity through the sale of their claims to the factor. Benefits of factoring

Claims management

Includes debtor bookkeeping, periodic credit checks, dunning systems and collections services. Claims management is often connected with significant expenditures in time and personnel for the company. The assumption of claims management is included in the factor’s service offer. Outsourcing

Claim revenue

Amount of revenue for factoring institutes

Commercial credit limit

The highest level of credit granted to the respective customer (receiver) based on their creditworthiness for the assurance of a commercial credit. 

Commercial credit insurance

Serves to protect against the risk of bad debt. The insurance does not assume the risk to 100% in contrast with the factor, but rather to 70 up to 85%. Premiums for commercial credit insurance may be saved through collaboration with a factor.

Credit

The credit worthiness of business partners, which is often expressed based on ratings that are included in the continuous credit check of the debtors for the factor’s service. It is a contributing factor in the decision for the amount of the factoring fee.

Debtor bookkeeping

Customer bookkeeping. Monitoring and posting of payment receipts will be assumed as part of the factoring contract by the factor.

Del credere

Calculation of value for the foreseeable bad debt that follows on the part of the factor.

Del credere protection

The factor’s liability for partial or full loss of claims through the receiver’s inability to make payment. The inability to make payment is considered to have occurred after a pre-determined period without special proof, when the receiver does not make payment and has not made notification of any complaints against their payment Obligation.

Dunning system

Part of claims management that is often transferred to the factor in most variations of Factoring 

Export/import factoring

Factoring for goods and services based businesses operating across national borders, in which companies (exporters and importers) use the services of a factor in Germany. The factoring provider will manage the factoring system either directly or through the activation of a correspondent partner in the respective export country. International factoring

Factoring

Factoring is understood to mean the continuing purchase of claims from goods and services delivered. Factoring serves to provide short-term revenue financing and one hundred percent protection against bad debts, including efficient claims Management.

Factoringcosts

The costs of factoring are composed of the interest for the financing of the claims and the factoring fee. The interest corresponds to the standard back open account interest analogous to the use of advances on receivables. The duration is calculated on the basis of the receipt of payment for the outstanding claims. On a case-by-case basis, an additional cost factor may be added for the credit check. Benefits of factoring 

Factoring customer

Seller of the claims and direct customer of the factoring institute 

Factoring fee

The price for the assumption of the risk of bad debt and the management of the claim by the factor. It is oriented towards the risk and the work effort and lies between 0.5% and 2.5% of the purchased claims inventory (gross revenue) in Germany. Expenses 

Factoring institute

Provider of the complex financial service of factoring including the additional short-term revenue financing and one hundred percent insurance against bad debts and the assumption of the management of the claim. Factors provide their customers a number of factoring variations in addition to standard factoring, as called full-service factoring, which are oriented towards the needs to the customer.

International factoring

Factoring for business delivering goods and services across national borders is called export or import factoring depending on the location of the factoring customer. The factoring business is managed either on a direct path or through the activation of a correspondent partner in the respective countries. Export/import Factoring. 

Liquidity

is often provided by the factor; the basic economic conditions for solid business success, which are often endangered through high outstanding balances. 

Loan ratio

Percentage of the monetary amount in the amount of the claims that the factoring customer is paid or the amount of the advances on receivables.

New insolvency statute

On Jan. 1 1999, the new insolvency statute came in to effect in Germany. It further limits the security rights of banks and savings banks for credits granted. Because of the special characteristics of the factoring business, the financing of claims by factoring institutes is not affected by the new insolvency statute.

OECD

Organization for Economic Cooperation and Development; member states are important industrial countries that have set themselves the goal of promoting and evaluating world trade, among other things.

Ottawa Convention

At the end of 1998, the Ottawa Convention about international factoring took effect in Germany. With the content of its regulations, it goes well beyond the factoring business, since it standardizes and simplifies the assignment of claims in transactions for goods and services across national borders in general and eases the financing of exports thereby.

Outsourcing

Externalization of individual operational roles, rationalizing effect, use of specialized service providers. Factoring makes the outsourcing of cost- and personnel-intensive claims management possible.

Outstanding balances

Unpaid invoices that encumber liquidity; dead capital view economically, which can be activated with the help of factoring free of problems.

Payment of the factor

The factor immediately pays up to 90% of the invoice amount after the presentation of a copy of the invoice. The remainder serves as reserve credit and is transferred under consideration of cash discounts, rebates or Returns.

Protection against bad debt

Protection against the risk of partial or complete loss of the claim due to a receiver’s (debtor’s) inability to make payment. The factor assumes the protection against bad debt up to 100%, without recourse. Del credere.

Rating

Evaluation or assessment of the creditworthiness of a Company.

Rebates

Provide cost savings when purchasing, the achievement of which is allowed through payment in cash as a rule. Advantageous purchasing conditions are hardly possible without sufficient liquidity. Benefits of Factoring

Security deposit

Reserved credit that is available to the factor for the settlement of rebates, cash discounts or potential complaints of defect by debtors. On average, such amounts to 10% of the purchased claim and is offset or paid out by the payment by the debtor. The payment and offset also occurs in the event of del credere. Payment of the factor.

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