B2B Factoring

What is B2B factoring?

B2B factoring refers to factoring of receivables from deliveries and services whose debtors are businesses or public-sector clients. B2B stands for business-to-business, that is, transactions between companies; the term B2B invoice factoring is also used. A factor buys these receivables on an ongoing basis, pays an advance on the invoice amount and, depending on the contract, assumes the default risk as well as the administration and collection of the receivables. As with factoring in general, in genuine factoring (without recourse) the factor bears the risk that a customer becomes insolvent; in non-genuine factoring (with recourse), it stays with the company.

It is the form of factoring customary in commercial dealings. Receivables from corporate customers are often large, have long payment terms and are based on individually negotiated contracts. This gives rise to specific questions: large customers' purchasing terms frequently exclude assignment, the creditworthiness of a few large customers determines the financing line, and in project and subscription business not every invoice is eligible for purchase. Legally, what matters in addition to the factoring agreement are the contracts with the customers and Section 354a of the German Commercial Code (Handelsgesetzbuch, HGB), a special rule on prohibitions of assignment.

Specifics of B2B factoring: receivables from corporate customers

Payment terms

Corporate customers often pay with terms of 30 to 90 days; large buyers push through longer periods. Payment periods of more than 60 days after receipt of the service are effective between businesses only if they are expressly agreed and do not grossly disadvantage the creditor (Section 271a of the German Civil Code (Bürgerliches Gesetzbuch, BGB)). Narrower limits apply to public-sector clients. If a corporate customer falls into payment delay, it owes default interest of nine percentage points above the base rate (Section 288(2) BGB), a reference interest rate that the German central bank (Deutsche Bundesbank) publishes every six months.

Limits and customer concentration

The factor reviews each customer individually and sets a purchase limit. If a large share of revenue depends on a few buyers, these limits restrict the financing line, because receivables above the limit are not advanced or are purchased only without default protection. Customer concentration therefore considerably affects volume and price. A group customer with very good creditworthiness does receive a high limit, but even that is exhausted if it accounts for a large part of the receivables portfolio.

Proof of performance and objections

Only receivables for fully performed services are eligible for purchase. A factor often does not purchase, or purchases only to a limited extent, advance invoices, for example for annual licences of software whose performance is spread over the year, and interim invoices for project phases without acceptance. Objections arising from the customer contract also count: complaints about defects, set-off against counterclaims, bonuses and credit notes reduce the amount the factor actually receives and, in case of doubt, fall back on the company.

Prohibitions of assignment in B2B factoring and Section 354a HGB

Purchasing terms of large companies and contracts with public-sector clients often contain a prohibition of assignment or make assignment dependent on the customer's consent. Under Section 399 BGB, an assignment contrary to such an agreement would be invalid. Section 354a(1) HGB breaks through this rule for monetary claims in two cases. The first is a transaction that is a commercial transaction for both sides, that is, belongs to the operation of their commercial business. The second is a debtor that is a legal entity under public law, such as a state or a municipality, or a special fund under public law. In both cases, the assignment is effective despite the prohibition, and deviating agreements are invalid.

The provision has limits. The customer can continue to pay the company with discharging effect, even if it knows of the assignment; the factor is then dependent on the money being passed on. The first group of cases requires that both sides are merchants and that the transaction belongs to their commercial business. A GmbH (German limited liability company) is always a merchant. For customers that are not merchants, such as freelancers who are not organised as a corporation, a prohibition of assignment, by contrast, remains effective, unless the customer belongs to the public sector.

In practice, factors review the customer contracts before purchase. Customers with a prohibition of assignment are often included in the silent procedure (undisclosed factoring), excluded from the purchase or asked for consent. Whether contractual penalties or termination rights that a customer attaches to an assignment take effect despite Section 354a HGB depends on how they are drafted and belongs in the legal review of the customer contracts.

B2B factoring in growing companies

Growth in business with corporate customers ties up liquidity: staff, materials and sales are paid immediately, while customers pay weeks or months later. The receivables portfolio grows with revenue, and with it the working capital tied up. A factoring line grows along, whereas an overdraft facility is usually limited to a fixed amount and needs a new credit decision for every increase.

Between two funding rounds, B2B factoring can extend the runway. Investors generally accept this as long as it finances current assets, that is, short-term tied-up assets such as receivables, and not ongoing losses. They therefore check under what conditions the factor may reduce or terminate the line and how quickly the line would then have to be repaid.

Business models with clearly delimited services and invoices after delivery are suitable, such as hardware, components, services billed by effort or software invoiced in arrears. Models with a high share of advance invoices or frequently disputed acceptances are less suitable.

Worked example: calculating the financing line in B2B factoring

A provider of industrial software with implementation projects invoices corporate customers EUR 800,000 per month. On average, payments are received after 75 days, that is, after 2.5 months. Over the next twelve months, the monthly invoice amount is to rise to EUR 1.2 million. The company's main bank provides a fixed working capital line of EUR 1.2 million. The largest customer, an industrial group, accounts for 30% of revenue. A factor offers an 85% advance on eligible receivables and sets a limit of EUR 600,000 for this customer. All values are assumed.

• Receivables portfolio today: EUR 800,000 × 2.5 = EUR 2.0 million
• Receivables portfolio in twelve months: EUR 1.2 million × 2.5 = EUR 3.0 million; the growth ties up an additional EUR 1.0 million
• Receivables from the largest customer in the target picture: 30% of EUR 3.0 million = EUR 900,000, of which above the limit EUR 300,000
• Advance invoices for annual licences that the factor does not purchase: EUR 200,000
• Eligible portfolio: EUR 3.0 million minus EUR 300,000 minus EUR 200,000 = EUR 2.5 million
• Advance: 85% of EUR 2.5 million = EUR 2,125,000; retention until payment EUR 375,000
• Difference from the fixed working capital line: EUR 2,125,000 minus EUR 1.2 million = EUR 925,000

The example shows the two levers in B2B factoring. If the company achieves a limit of EUR 900,000 for the large customer, the advance rises by 85% of EUR 300,000, that is, by EUR 255,000. If it bills the annual licences quarterly after performance, a further part of the receivables becomes eligible for purchase. The costs of factoring must be weighed against this gain in liquidity and against the alternative of additional equity.

Distinctions: B2B factoring, reverse factoring and B2C factoring

• Factoring: the umbrella term, with functions, costs and accounting treatment that apply to all customer groups.
• Reverse factoring: initiated by the large buyer. Its suppliers sell their receivables from it to a bank or platform, on terms based on the buyer's creditworthiness; the buyer often uses this to extend its own payment terms.
• B2C factoring: purchase of many small receivables from consumers, usually through payment service providers in online retail. Section 354a HGB does not apply there because consumers are not merchants.
• Revenue-based financing: financing against future revenue, repaid as a share of ongoing revenue, with no reference to individual invoices.

Common mistakes

• Customer contracts not reviewed. Prohibitions of assignment, set-off rights and customers that are not merchants decide which receivables the factor can actually acquire.
• Customer concentration underestimated. The limits for the largest buyers often determine the usable line more than total revenue.
• Advance invoices included in the plan. Invoices for services not yet performed are often not purchased and are then missing from the liquidity planning.
• Advance planned in full. Costs are deducted from the advance, and the retention is paid out only after the customer pays. VAT on the invoices, under accrual-basis VAT accounting, which is the normal case, is already payable once the service has been performed, irrespective of receipt of payment.
• Receivables management neglected. Late invoicing and unclear proof of performance delay the purchase and increase the number of charge-backs.
• Payment terms not negotiated as well. Shorter terms in sales reduce the financing need without triggering fees.

Frequently asked questions

How does B2B factoring work?

After the framework agreement is concluded, the factor reviews the company's customers and sets a limit for each. The company then submits its invoices on an ongoing basis and usually receives the advance within a few days. The factor pays out the retention, less its costs, as soon as the customer has paid.

Is an assignment effective despite a prohibition of assignment in the customer contract?

As a rule, yes, if the transaction is a commercial transaction for both sides or the customer belongs to the public sector, such as a state or a municipality (Section 354a HGB). The customer may then, however, continue to pay the company with discharging effect.

From what revenue does B2B factoring come into consideration?

There is no fixed threshold. Many providers require a minimum revenue, and there are also offers for smaller volumes and for individual invoices. More important than revenue are customer structure, invoice sizes and the quality of the proof of performance.

Does a factor purchase receivables from software subscriptions?

To the extent that the service has already been performed, yes, for example with monthly billing in arrears. Annual invoices in advance, by contrast, are often regarded as not eligible for purchase because the consideration is still outstanding.

Does B2B factoring reduce the capital requirement of a funding round?

Partly. If the growth in the receivables portfolio is financed through factoring, the round does not need to cover this amount, and the dilution of the shareholders is smaller. Losses and investments must still be borne by equity.

The Roemer Capital view

In planning a funding round, we separate the capital requirement by its cause: losses until profitability, investments and the current assets that grow with revenue. Covering the last part through B2B factoring or a working capital line can reduce the size of the round. The prerequisite is that customer contracts, the billing model and customer concentration support a sufficient line; we check this with the company before the amount goes into the financial model.

For companies with a few large buyers, we address the question of prohibitions of assignment early. The legal review of the customer contracts lies with the company's law firm; we calculate the effects on the financing line and on liquidity planning.