Factoring, supplier credit and Skonto: fees, recourse versus non-recourse and the cost of a missed cash discount

What you will learn

• Why supplier credit is not free and the formula for the annualised cost of a missed Skonto (early-payment discount).
• How factoring works: advance rate, retention, fee, interest and recourse versus non-recourse.
• How to calculate the real annual cost of a factoring contract and net it against the savings.

Explanation

Supplier credit and Skonto

When a supplier delivers today and lets you pay in 30 days, it has given you a supplier credit (Lieferantenkredit). It feels free, but the price is hidden in the Skonto: a typical German invoice says "2 % Skonto within 10 days, net within 30 days". Paying on day 30 instead of day 10 means borrowing the money for 20 extra days at a price of 2 percent of the invoice.

The annualised cost of forgoing the discount is:

cost per year = d ÷ (1 − d) × 360 ÷ (N − D)

where d is the discount rate, D the discount period and N the net payment period in days. For 2 % / 10 / 30: 0.02 ÷ 0.98 × 360 ÷ 20 = 0.0204 × 18 = 36.7 percent per year. Almost no overdraft is that expensive, so the rule of thumb is: take the Skonto, even on borrowed money, as long as the overdraft rate is below the annualised Skonto cost. The exception is a long net term: 2 % / 7 / 60 costs only about 13.9 percent, close to overdraft rates and a genuine judgement call.

Factoring

Factoring means selling open business-to-business invoices to a factor (a bank or specialised company). The factor pays an advance, typically 80 to 90 percent of the gross invoice, within a day or two; the retention (Sicherheitseinbehalt) follows when the customer pays, minus two costs:

• A factoring fee, a percentage of gross invoice volume covering administration, dunning and credit risk; it depends on volume, invoice size and customer quality.
• Interest on the advanced amount for the days until the customer pays, usually a reference rate plus a margin.

The contract forms that matter:

• Non-recourse (echtes Factoring): the factor takes the credit risk (Delkredererisiko); if the customer goes bankrupt, you keep the advance. This is the usual form in Germany and removes the receivable from your balance sheet, which improves the equity ratio.
• Recourse (unechtes Factoring): you must repay the advance if the customer does not pay. Cheaper, but economically a loan secured by receivables.
• Disclosed (offen) versus undisclosed (still): whether the customer is told to pay the factor. Full-service factoring includes dunning; in-house factoring leaves it with you.

Factors accept only undisputed invoices for completed deliveries (Verität), usually not to private customers, and set a limit per customer. Factoring is a working-capital tool for growing firms with long payment terms, not a rescue for a firm whose customers do not pay.

Worked example

Hypothetical example: a packaging wholesaler invoices €50,000 gross per month to business customers who pay after 45 days on average. Offer: non-recourse factoring, 90 percent advance, 1.5 percent fee on gross volume, 7 percent interest per year on the advance. Set-up fees, VAT handling and taxes are excluded; 360-day year.

Cost per month

Advance: 90 % × €50,000 = €45,000.

Factoring fee: 1.5 % × €50,000 = €750.

Interest: €45,000 × 7 % × 45 ÷ 360 = €393.75.

Total: €1,143.75 per month = 2.29 percent of volume. Over the 45 days the money arrives early, that is 2.29 % × 360 ÷ 45 = about 18.3 percent per year on volume, or about 20.3 percent on the €45,000 actually advanced.

What the wholesaler gets back

With the cash it pays its own suppliers within the Skonto period: on €25,000 of monthly purchases a 2 percent Skonto saves €500. The factor also takes over dunning and credit risk, replacing a trade credit insurance and office time; assume €200 per month. Net cost: €1,143.75 − €500 − €200 = €443.75 per month for €45,000 of permanent liquidity with no exposure to customer bankruptcies. An 11 percent overdraft on €45,000 would cost about €412 per month, but needs a credit limit the firm may not get and leaves the credit risk with the firm.

The Skonto decision alone

A €10,000 invoice at 2 % / 10 / 30: paying on day 10 saves €200; financing €9,800 for 20 days at 11 percent costs €9,800 × 11 % × 20 ÷ 360 = €59.89. Net gain about €140.

Common mistake

Practice activity

On paper: (a) A supplier offers 1 % Skonto within 10 days, net 45. Calculate the annualised cost of paying on day 45 and decide whether to use a 12 percent overdraft to take the discount. (b) A design studio with €80,000 monthly gross invoices and 60-day terms is offered factoring: 85 percent advance, 1.2 percent fee, 6 percent interest per year. Calculate the monthly cost and the annualised cost on the advance.

Key takeaways

• Supplier credit costs the Skonto you forgo: d ÷ (1 − d) × 360 ÷ (N − D), about 37 percent per year for 2 % / 10 / 30, so take the discount whenever cheaper money exists.
• Factoring costs a per-invoice fee plus interest on the advance; convert both to an annual rate before comparing with a loan.
• Non-recourse factoring removes the credit risk and the receivable from your balance sheet; recourse factoring is a loan in disguise.

Next step

The next lesson moves from debt to equity: what business angels, venture capital and crowdinvesting mean for a founder's ownership and control.