Factoring limit – what is it?
As with factoring itself, there are several terms under the term factoring limit that need to be delineated to fully understand what a factoring limit is. Learn about the types of factoring limits!
Global limit
This is a basic parameter of factoring, important primarily for the factor, i.e. the company using the factoring service. The allocated global limit sets the maximum amount that the factor can receive from the factor. This is the total amount, so it depends neither on the number of recipients nor on the number of financed invoices.
Concentration limit
This parameter indicates the percentage of the maximum that invoices issued to a single customer can contribute to the total balance of receivables. The factor grants such a limit with reference to the financial condition of a particular recipient.
If the concentration limit for one recipient (company X) is 15%, and the total amount of invoices that the factor has submitted for financing is PLN 140,000, this means that the factor will be able to finance invoices issued to company X in the maximum amount of PLN 21,000 (15% of PLN 140,000). Exceeding the concentration limit can make it the entrepreneur who has to pay the rest of the needed amount.
Sublimit
This parameter is also called the counterparty limit. It indicates the maximum amount that a factor can pay out, financing invoices issued to a given customer. The sublimit is set individually for each recipient.
Relationships between limits
The global limit (a.k.a. factoring limit) is the maximum total amount that a factor can pay to a factor. Let’s explain with an example.
EXAMPLE
Mr. Alexander’s company was granted a limit of PLN 400,000 by the factoring company. At the same time, Mr. Alexander reported four contractors for financing. Sublimits for them were set at: PLN 40,000, PLN 120,000 and twice PLN 150,000 each. Thus, if the total amount of invoices to be financed exceeds PLN 400,000 in a given accounting period, Mr. Alexander’s company will receive a maximum of PLN 400,000 despite the fact that the total amount of sublimits is PLN 460,000. The rest of the amount will remain unfunded. It should be noted that the higher value of sub-limits allows greater flexibility in financing invoices, and it does not affect the global limit or contract costs.
How do factoring companies determine the amount of the factoring limit?
Factoring companies have to take several factors into account when setting a factoring limit. To do this, they analyze the financial situation of the factor, as well as its counterparties. The final result is influenced primarily by the financial condition of the company, but also by the payment terms used so far, entries in BIK, BIG and other databases.
The assessment is also influenced by reports on trading activities, as well as which entities and counterparties the factor works with.
When signing a factoring agreement, the parties agree to set factoring limits. However, this does not mean that they are inviolable and valid for the entire contract period.
The terms of the agreement can be negotiated, although to increase the chances of favorable changes, the factor should give the factoring company the right arguments: pay invoices on time and regularly improve the financial situation of his company. With these two elements, both sides can anticipate that further cooperation will work out favorably.
How to choose the amount of factoring limit?
We already know that it is the factoring company that has the final say in determining the amount of the factoring limit – after all, it is their money that will finance the applicant’s enterprise. However, this does not mean that one should accept the factor’s decision, whatever it may be.
On the contrary, already at the time of filling out the application it is good to have at least a general idea of what kind of factoring limit will satisfy your enterprise.
In factoring – as in credit – more is not always better. It is best to choose a perfectly balanced limit amount to avoid costs (if the limit is too high) or insufficient financing (if it is too low). What is worth keeping in mind when applying?
Check the factoring limits offered by the factor
If you need financing at 1,500,000 per month and the factor offers lower amounts, don’t be discouraged. For example: PragmaGO offers a global limit of up to PLN 15,000,000 as standard in its online factoring process. However, this doesn’t mean that you don’t have a chance to get a larger amount. In your application, indicate the maximum amount, i.e. 15 million zlotych, and when the advisor contacts you, let him know that your needs are greater. Remember, too, that startups and small companies with much lower demand can apply for financing.
Determine the amount of funding needed
Also set two other ceilings: the minimum and maximum amount of financing that is acceptable to your company. Remember to take into account the payment terms used – they largely affect how much factoring limit your company will need. This will leave you room for negotiation and properly prepare you for the factoring agreement.
