The potential of factoring as part of the working capital management. How far can German SME´s improve their financial management by the usage of factoring?

Abstract

The consequences of the new bank regulation law Basel III will force German small and medium-sized enterprises to think about alternative forms of finance. In order to finance their business activities and to ensure a sufficient amount of liquidity within the company these firms could use factoring as part of their working capital management respectively their receivables management. This dissertation shows that factoring would offer immense advantages to German SME´s concerning their liquidity management. Next to the opportunity to shorten the Cash Conversion Cycle they could also become less addicted to bank loans and their liquidity planning process could be simplified. However, it turned out that the willingness of using factoring depends on the company size. Especially smaller SME´s in Germany still deny the usage of factoring because they are afraid that the close relationship to their clients may be damaged. The study also identified a positive correlation between the average distance to the client and the willingness to use factoring. In other words SME´s which are located far away from their clients apply factoring more often than companies which are located near their clients. Moreover it was found out that international factoring has a very high potential for small and medium-sized enterprises in Germany. In view of the growing meaning of internationalization for German SME´s, the usage of international factoring will surely increase in the future. Author keywords: