Factoring and performance: evidence from Portuguese firms

Purpose This study examines within-firm associations between factoring use and firms' financial ratios, with the aim of understanding its accounting implications for corporate financial statements. Design/methodology/approach Using a unique, large panel dataset of Portuguese firms (2009–2022) comprising 926,593 firm-year observations, we estimate fixed-effects models to document how the use of factoring is associated with changes in liquidity, solvency, and profitability indicators. Firm-level controls and year fixed effects are included to account for observable and unobservable heterogeneity. Findings The results suggest that factoring use is consistently associated with higher liquidity and solvency ratios, alongside lower net profitability (ROA and ROE), but higher operating return on sales. These patterns point to a systematic tension between improvements in balance-sheet indicators and costs reflected in the income statement. This tension helps explain the continued use of factoring despite its adverse association with net profitability. Research limitations/implications The analysis is descriptive and does not identify causal effects, as firms self-select into factoring. The relatively low share of firms using factoring may also limit generalizability. Future research could explore identification strategies and sectoral heterogeneity. Practical implications The findings suggest that factoring is associated with improvements in financial statement presentation, particularly in liquidity and solvency, but also involves costs that affect profitability. This trade-off is relevant for managers evaluating short-term financing strategies. Policymakers may also consider promoting factoring as a viable financing channel for SMEs facing credit constraints. Originality/value This study contributes by providing large-scale evidence on the accounting consequences of factoring, documenting and interpreting the trade-off between balance-sheet improvements and income-statement costs rather than identifying causal effects.