Factoring is a perfect solution for entrepreneurs who grant trade credits to their customers and consequently contend with the shortage of working capital. We convinced of that and of the other benefits of factoring in many texts, e.g.: Boom or slump – when to use factoring? Factoring has more than one name – which one to choose for our company? What other benefits does factoring ensure for a company?
If an entrepreneur has already made a decision to implement this solution in its company, it is worth now to put attention to the most important elements of a factoring agreement.
A factoring limit is the criterion to grants funds. Basic notions you should familiarise with are: global limit, sub-limits and concentration limit.
The global limit determines the limits of factor’s financial engagement and is independent of the sum of limits granted for the factorer’s customers. In turn, sub-limits granted to the factorer’s individual customers mean maximum amounts the factor will pay to the factorer in order to finance a given customer. The global limit may be lower than the sum of sub-limits granted to customers. Example: when granting funds to the factorer, the factor grants limits for 4 customers in the amount of PLN 100,000 each and a global limit amounting to PLN 300,000.
In order for factoring funds to bring maximum benefits to the company, the limit should be adjusted to the value of turnover the enterprise has with the customers reported for financing.
Since granting a too high limit may involve the necessity to incur higher costs of financing, inadequate to the current needs. In turn, a too low limit means the entrepreneurs use insufficient turnover with their customers required for the improvement of their financial liquidity. In practice, having exceeded the sub-limit, an entrepreneur does not get any funds for subsequently submitted invoices, thus some of the funds from the invoices are frozen.
It is worth to know that you can change the limit, even during the term of the agreement. For instance, it is possible to increase the limits, when the factor gets positive experience in cooperation with the factorer’s customers. Increasing the factorer’s turnover with its customers may also constitute the basis to change the limit.
However, one should remember that most factors calculates extra charge when increasing limits. Entrepreneurs should also remember that only some factors offer to increase the limits, having first assessed agreement performance and limit level. That is why, factorers should show their own initiative to ask for it.
Published on: 9 November 2016