Definition and economic purpose of factoring Factoring refers to a special form of financing in which companies sell their existing trade receivables to a third party (the so-called factor) in order to obtain liquid funds immediately. The factor is typically a bank or a specialized financial services provider who buys the receivables portfolio for a discount and immediately pays out the majority of the receivables amount to the selling company. In addition to the short-term increase in liquidity, factoring also relieves the company of administrative work, as receivables management, dunning and, if necessary, debt collection are handled by the factor. Factoring is used in particular to optimize liquidity and reduce default risks. This form of financing is particularly suitable for companies that are reliant on the rapid conversion of receivables into liquid funds or have extensive receivables portfolios.

Legal basis and assignment in accordance with Section 398 of the German Civil Code (BGB) The legal basis of factoring is assignment in accordance with Section 398 of the German Civil Code (BGB). The receivables are transferred to the factor upon conclusion of the factoring agreement, whereby the debtor’s consent is not required unless otherwise agreed. It is important that all ancillary rights (e.g. security rights, guarantees or liens) are automatically transferred as part of the assignment. When drafting the assignment agreements, care must be taken to ensure that no assignment prohibitions from existing contracts are violated. The assignment gives the factor full legal status as a creditor vis-à-vis the debtor, which is particularly relevant for the enforcement of claims.

Distinction between genuine and non-genuine factoring In factoring, a legal distinction is made between genuine and non-genuine factoring. In genuine factoring, the factor assumes the so-called del credere risk, i.e. the risk of default on receivables. This means that the factor has no recourse against the selling company if the debtor does not settle the receivable. With non-genuine factoring, on the other hand, the default risk remains with the original creditor and the factor can turn back to the company if the receivable is not paid. This distinction is decisive for the contract design and affects the conditions (in particular fees and discounts) that the factor demands for its service.

Content and special features of the factoring agreement The factoring agreement regulates in particular the conditions of the assignment of receivables, the amount of the discounts, any fees and the obligations and rights of both parties. Central provisions also relate to the factor’s ability to take recourse in the event of bad debts, provided it is a case of non-genuine factoring. Furthermore, clauses on the disclosure of the assignment of receivables to the debtor are often agreed. In cases of so-called “silent factoring”, the debtor is not informed, which means that the company continues to maintain the customer relationship independently. In any case, contractual provisions on termination options, deadlines and possible renegotiation of conditions should be included.

Data protection requirements under the GDPR The transfer of personal customer data to the factor is subject to strict data protection requirements, in particular in accordance with Art. 6 of the General Data Protection Regulation (GDPR). According to Art. 6 para. 1 lit. b GDPR, the transfer of personal data is permitted if it is necessary for the fulfillment of the factoring contract. Nevertheless, companies must ensure that they only transfer customer data that is absolutely necessary for the collection of receivables. In addition, the factoring agreement should explicitly regulate how the factor processes, stores and protects the data in order to minimize data protection risks.

Advantages of factoring for companies Factoring offers companies considerable economic advantages, in particular an immediate increase in liquidity and an improved balance sheet structure. Outsourcing receivables management also reduces administrative costs and expenses, which leads to a stronger focus on the core business. Genuine factoring also offers protection against bad debt losses and therefore increases planning security for the company. Factoring can also have a positive effect on credit ratings, as receivables are immediately converted into cash, which improves key financial figures.

Risks and possible disadvantages of factoring Despite the advantages, factoring is also associated with certain disadvantages and risks. For example, the fees and discount charged by the factor can lead to a reduction in margins. In addition, the disclosure of factoring to customers can have a negative impact on the relationship of trust unless silent factoring has been agreed. In the case of non-genuine factoring, there is also a considerable default risk for the company. Finally, there is a risk that assignment prohibitions in existing contracts may be violated, which could result in claims for damages or terminations by customers. A careful contractual and legal review in advance is therefore essential in order to minimize these risks.