What is factoring?

There are many alternative financing methods available today:revenue-based financing, microcredit, etc. Factoring (otherwise known as "factoring") is a financing method in its own right, attracting companies in a wide variety of sectors. This type of contract operates between a company (known as a "factor") and a BtoB ("Business to Business") professional, enabling companies to manage their cash flow more effectively.

Factoring, a financing technique for companies

Factoring is a financing technique also known as "factoring", designed to help companies manage their cash flow. In practical terms, companies assign their trade receivables (customer invoices) to a third party known as a factor. In return for these receivables, the factor pays between 80% and 90% of the face value of the invoices to the company, without delay and in the form of an advance. Once customers have paid their invoices, the factor pays the remaining amount to the company, after deduction of applicable commissions and miscellaneous charges.

For companies, this is an interesting technique in their financing strategy for several reasons:

• This gives them immediate access to cash by collecting a large proportion of invoice amounts, without waiting for actual payment from customers. This rapid access to cash is all the more important when the company needs to finance major operations,
• Factoring is seen as an alternative to traditional bank lending, since it does not rely on traditional debt,
• The company can better manage its operating cycle thanks to shorter payment times. It also reduces working capital requirements,
• This technique is often a stepping stone to new growth opportunities, thanks to the access to liquidity it affords. It can help companies expand and reach new markets.

Who can benefit from factoring?

It is aimed at all companies, large and small, as well as craftsmen, shopkeepers, associations and the self-employed. This financing technique is not limited to a single professional profile - quite the contrary. It can be used in any business sector, regardless of size, and whether or not the company exports its products.

The different types of factoring

There are several types of factoring for all business needs:

• factoring with recourse, the most traditional. If the customer fails to pay, the company remains liable and must repay the advance received from the factor,
• non-recourse factoring, where the factor assumes the risk of non-payment by the customer,
• confidential factoring, which enables companies to sell invoices without informing their customers. Customers pay the company directly, but the factor handles financing and debt collection,
• notified factoring, whereby customers are informed of the assignment of receivables to the factor. They then pay the invoices directly to the factoring company,
• reverse factoring, initiated by the buyer as a customer of the company,
• balance factoring, which covers all the company's receivables,
• international factoring, ideal for exporting companies,

import/export factoring, similar to the international version, but specializing in trade linked to specific imports and exports.

Factoring contract: key features

This contract is an agreement between a factoring company and a company that assigns its invoices. The contract provides for the receipt of part of the amount of the receivables issued to the company wishing to improve its cash flow, in return for commissions for the factoring company.

A distinction is commonly made between "with recourse" and "without recourse" factoring. When factoring "with recourse", the company must repay the advance received if the customer fails to pay its invoices. With "non-recourse" factoring, the factoring company assumes responsibility in the event of non-payment by the customer.

The factoring contract also includes important clauses in the agreement between the parties. These include details of the services offered by the factor, insurance against the risk of non-payment, and debt collection management. In return, the factor is remunerated via commissions on receivables and management fees. This represents a cost for the company, but factoring helps it to secure its cash flow while concentrating on its core business.

Finally, the factoring contract sets out the duration of the commitment and the conditions for termination. The parties may stipulate a fixed or indefinite term, with specific conditions for termination, particularly if the company or factor experiences a sudden change in its financial situation.

How do factoring operations work?

Factoring operations follow a process structured around several key stages:

• Signature of the factoring contract with the factor,
• Assignment of trade receivables by the company,
• Receivables verification by the factoring company,
• Cash advance, generally between 80% and 90%, directly from the company,
• Debt collection by the factoring company, which collects invoices from the company's customers,
• Payment of the balance remaining to the company, after deduction of fees and commissions.

It should also be noted that the way in which disputes are handled depends on the type of factoring chosen, in particular whether it is with or without recourse.

Factoring and B2B sales via marketplaces

In principle, factoring is of no real interest in B2C ("Business to Consumer") sales, since purchases are made in cash (traditional shops, supermarkets, etc.). However, the situation is different when sales are made via an intermediary, as is the case with marketplaces. In this case, there is a negotiated payment term, and therefore a real interest in factoring.

Today, companies often use marketplaces to reach a large number of customers outside their local market. Marketplaces frequently offer customers payment terms ("Buy Now Pay Later", payment in instalments, etc.), which can be a concern for companies with large, immediate cash requirements. Receivables arising after the payment deadline are considered eligible for factoring.

Good to know: Companies are not obliged to factor all their customers. It can choose this solution for a single customer or a single invoice when it needs to relieve its cash flow requirements from time to time.

Which companies are authorized to do this in France?

No company can become a factoring professional overnight. TheACPR (Autorité de contrôle prudentiel et de résolution) strictly supervises this financial operation, to prevent any excesses. Only this authority can authorize specialized credit institutions (ECS) and finance companies to engage in factoring. If these companies and institutions are not approved by the ACPR, this means that they cannot legally offer factoring services.

Is factoring right for every company?

Asking whether this technique is suitable for all companies inevitably raises the question of its limitations. In this respect, factoring is not suitable for all companies. Some may be put off by the cost-benefit ratio, as commissions can be high. For small companies and those with low profit margins, the costs associated with collecting trade receivables can outweigh the expected financial benefits.

In addition, factoring companies may impose strict conditions on companies, particularly with regard to the quality of receivables and their general creditworthiness. When a company works mainly with customers with poor creditworthiness or who are financially at risk, it may find it difficult to conclude a contract.

Notified factoring can also affect business relationships. Customers may view the practice negatively, which in turn may more or less alter the relationship of trust created between the parties. If the company already has sensitive relationships with its customers, notified factoring should be avoided.

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