Factoring in France: pros, cons, and best practices

Factoring has become a central tool for financing working capital needs, but its legal, financial and accounting implications are often underestimated by managers. This article offers an in-depth analysis of the advantages and disadvantages of factoring, its various arrangements (online factoring, reverse factoring, deconsolidating factoring) as well as a comparison with the Dailly sale to help you structure a financing strategy adapted to your business.

As a manager, you need to understand factoring not only as a financial product, but as a real one. contract for the organization of your customer station, with legal impacts (transfer of claims, contractual clauses, remedies), accounting (deconsolidation or not of claims) and operational impacts (supplier/customer relationship, management of customer accounts).

1. What is factoring? Legal and economic definition

1.1. General definition of factoring

Factoring is an operation by which a company transfers all or part of its commercial receivables to a specialized institution (the factor or factoring company) which, in return, provides it with financing, takes care of the collection and, depending on the case, takes care of the collection and, depending on the case, the risk of non-payment. Factoring is recognized as a credit transaction governed by the Monetary and Financial Code, which regulates in particular the transfer of receivables via mechanisms similar to the Dailly sale.

Economically, factoring makes it possible to transform trade receivables into immediate cash, in exchange for factoring fees and possibly a financing commission. It is a tool for managing BFR particularly suitable for businesses facing long payment terms or strong growth.

1.2. Legal bases: assignment of claims and subrogation

Legally, the factoring contract is based on the transfer of trade receivables to the factor, often formalized by slip in accordance with the provisions of the Monetary and Financial Code, in a scheme similar to the Dailly sale. This transfer transfers to the factor the ownership of the claims, allowing it to act for recovery directly against the assigned debtors, subject to enforceable exceptions (disputes over the reality of the delivery, compensation, etc.).

Case law has specified the effects of this transfer, in particular on the transmission of contractual terms such as clauses conferring jurisdiction, whose enforceability against the factor has been confirmed by recent decisions. In practice, this means that the factor may be bound by certain clauses in the underlying commercial contracts, which requires vigilance in drafting and managing contracts with your customers.

1.3. Concrete example: a growing manufacturer

Let's imagine an industrial SME with a turnover of 8 million euros, with customer payment terms of 60 days on average, and a strong growth in orders. Without factoring, cash flow is continuously tight: the company pays its suppliers at 30 days, but only cashes in at 60 days, creating a permanent lag. By setting up a factoring contract covering 70% of customer accounts, the manager obtains immediate financing on the majority of his invoices, which allows him to finance raw materials and production without systematically using a bank overdraft line.

2. How does factoring work?

2.1. The main steps of a factoring operation

A factoring operation generally follows a pattern in several steps: conclusion of the factoring contract, issuance and transmission of invoices to the factor, immediate financing of part of the invoice, collection of claims by the factor and payment of the balance to the company after deduction of expenses. Depending on the contracts, factoring can be global (covering almost all of the accounts receivable) or selective (covering certain customer lines or certain countries).

The factor first carries out an analysis of the quality of the customer portfolio, sets limits on outstanding amounts per debtor and may require certain contractual guarantees (declarations on the quality of claims, commitment to repurchase in the event of a dispute, etc.). This implementation phase determines the amounts that can be mobilized and the rates offered.

2.2. The different types of factoring (with recourse, without recourse, confidential, deconsolidating)

The main distinction is made between:

• Recourse factoring, in which the company remains liable to the factor in the event of non-payment, which may re-impute outstanding claims beyond a certain period of time;
• Non-recourse factoring, in which the factor assumes the risk of insolvency of the debtor (subject to exclusions, for example in the event of commercial litigation) and cannot turn against the company in the event of final default by the customer;
• Confidential factoring, in which the debtor is not informed of the assignment of the claim and continues to pay the supplier, with the flows then returned to the factor using agreed mechanisms;
• Balance or management factoring, focused more on the management of accounts receivable and debt collection, with more or less extensive mobilization of receivables.

Non-recourse factoring can, under certain conditions, be qualified as deconsolidating, the receivables having been removed from the company's balance sheet, which reduces the number of accounts receivable and improves certain financial ratios. Conversely, recourse factoring often leaves claims on the balance sheet, as the factor does not fully assume the credit risk.

2.3. Online factoring: specific operation

Online factoring transposes this scheme onto digital platforms that allow you to transfer invoices and obtain financing in 24 to 48 hours, sometimes less, via automated processes. The company uploads its invoices, the factor analyzes the risk on the basis of banking and accounting data, and offers financing of up to 80 to 100% of the amount of the invoices, subject to risk parameters.

For a VSE/SME manager, online factoring allows a large flexibility, with the possibility of selecting invoice by invoice those that will be transferred, without necessarily engaging in a heavy global contract. On the other hand, the fees can be significantly higher than those of traditional bank financing, which requires a detailed analysis of the complete cost of the solution.

3. What are the benefits of factoring for businesses?

3.1. Immediate improvement in cash flow and working capital

One of the main advantages of factoring is the rapid improvement of cash flow: the company collects its receivables almost immediately instead of waiting for contractual payment deadlines. This makes it possible to finance growth needs (recruitments, investments, inventory increases) and to reduce the use of bank overdraft, which is often more volatile and sometimes more expensive.

In terms of working capital, factoring mechanically reduces the period of turnover of trade receivables, which can be decisive in sectors with long production cycles (industry, construction, project IT services). In some deconsolidating arrangements, this improvement is also reflected in the financial ratios presented to partners, investors and banks.

3.2. Outsourcing recovery and securing customer risk

The factor takes care of debt collection management, from reminders to more formal procedures in the event of unpaid debts, which allows the company to focus on its core business. This outsourcing is particularly useful for structures that do not have an internal credit department or a structured debt collection department.

When the contract includes a guarantee against unpaid invoices (factoring without recourse), the factor bears the risk of insolvency of the debtors, subject to the ceilings, deductibles and exclusions provided for in the contract. The manager can thus secure his client workstation, especially when his main customers represent a very significant part of the turnover.

3.3. Optimization of the balance sheet thanks to deconsolidating factoring

In the assemblies qualified bydeconsolidating factoring, the receivables transferred leave the company's balance sheet, which reduces the amount of receivables and the apparent debt. The factor then assumes credit risk without recourse against the company, which justifies no longer accounting for the claim in the social accounts, subject to compliance with accounting criteria and IFRS.

For groups or companies under banking covenants, this improvement in ratios (gearing, debt ratio, WFR) can be a significant advantage in negotiating with funders or investors. However, it is necessary to anticipate the expectations of auditors and lenders as to deconsolidation conditions.

3.4. Example: securing a large risky account

An ETI generates 40% of its turnover with a major customer whose rating has recently deteriorated, posing a major risk to business continuity in the event of failure. By using factoring without recourse targeted at this customer, the company transfers the risk of insolvency to the factor over an outstanding volume of several million euros, in return for a risk premium integrated into the fees.

The manager accepts a higher factoring cost than other sources of financing, but benefits from substantial protection against a worst-case scenario of strategic customer default. In this type of situation, factoring is used as much as a tool for risk management only as a cash flow product.

4. What are the disadvantages and risks of factoring?

4.1. Factoring costs: commissions and ancillary costs

Factoring fees generally include a service fee (management, collection, possible credit insurance) and a financing fee calculated as a percentage of the amounts financed, at a rate often between around 0.5% and 4% depending on the risk profile and the volume sold. Some offers also include ancillary costs (application fees, minimum fees, non-use fees, litigation costs), which can significantly increase the overall cost.

For an SME, the cost of factoring may be higher than a traditional bank line of credit, especially for modest volumes or customer portfolios considered riskier. It is therefore essential to compare the full cost of factoring with other sources of financing, taking into account the added value in terms of recovering and covering customer risk.

4.2. Impact on commercial relationships with customers

In some sectors, customers may negatively perceive the notification of transfer of receivables to a factoring company, seeing it as a sign of financial fragility. In addition, the factor recovery policy (pace of reminders, tone of exchanges, processes used) can affect the quality of the commercial relationship if it is not finely calibrated.

It is therefore necessary to choose a factor whose collection practices are compatible with your commercial positioning and to anticipate communication with your major accounts. In some cases, factoring that is confidential or limited to certain customers is preferred to limit this impact.

4.3. Contractual complexity and operational constraints

Factoring contracts often contain technical clauses: declarations and guarantees on the quality of receivables, exclusion of disputed claims, repurchase clauses, guarantee ceilings, information obligations in case of difficulty on a customer, etc. A poor understanding of these clauses can lead to situations of re-invoicing of unpaid debts to the company or refusal to take charge of certain claims by the factor.

Operationally, factoring involves adapting internal processes (invoicing, monitoring cash receipts, accounting reconciliations, exchanging data with the factor), which can be cumbersome for structures that are not very digital. Hence the importance of legal and financial support when setting up or renegotiating a factoring contract.

4.4. Example: dispute over the quality of claims

An IT services company gives in to the factor of invoices relating to a complex project, on which a customer then invokes defects in execution and suspends payments. Under the contract, the factor considers that the claim is litigious and turns against the company to obtain the reimbursement of the amounts advanced, as factoring without recourse does not cover outstanding payments related to a commercial dispute.

This type of situation illustrates the importance of properly qualify the risks covered by the contract and to put in place internal procedures to promptly notify any dispute that may affect an assigned claim. An adapted wording of guarantee clauses and repurchase mechanisms is decisive here.

5. Online factoring: advantages, disadvantages and use cases

5.1. Specificities of online factoring

Online factoring is characterized by fully digital subscription and management, with simplified onboarding and the automation of risk analysis via connections to bank accounts and accounting software. Financing decisions are made in near real time, sometimes allowing financing to be obtained in just a few hours.

This approach is particularly appealing to startups, small businesses and some fast-growing SMEs, who are looking for fast, flexible financing that is compatible with irregular billing cycles. Platforms often offer great price transparency, with fees displayed as soon as the simulation is carried out, which facilitates comparison.

5.2. Advantages and limitations of online factoring

Among the advantages of online factoring are the speed of implementation, flexibility (possibility of assigning invoices to the card), and ease of use for financial teams with few resources. It can be an effective interim solution to reach a growth milestone or absorb a significant temporary need for cash flow.

Its limitations are mainly due to a cost that is often higher than that of traditional banking solutions and to a sometimes increased requirement in terms of data quality and compliance (KYC, supporting documents, etc.). For more mature companies with large volumes, a “traditional” factoring contract negotiated with a factor or a banking institution may prove to be more competitive.

5.3. Example: B2B startup and online factoring

A B2B SaaS startup invoices its customers on annual subscriptions, with payments that are sometimes delayed despite signed contracts. By using an online factoring platform, it selectively transfers invoices from its main customers, obtaining rapid financing without having to renegotiate its banking package.

This flexibility allows it to finance its product development and recruitments without capital dilution, while maintaining the possibility of reducing or stopping the use of factoring if its cash flow improves.

6. Reverse factoring: interest for buyers and suppliers

6.1. What is reverse factoring?

Reverse factoring, or reverse factoring, is a device by which the buyer (and not the supplier) sets up, with a factor, a financing program intended to allow its suppliers to be paid more quickly. The factor pays the suppliers before the due date, for a commission, and the buyer then reimburses him according to the agreed deadlines.

This mechanism is often used by large companies to secure their supply chain and improve the payment conditions of their strategic suppliers, while maintaining, or even extending, their own payment deadlines.

6.2. Advantages and disadvantages of reverse factoring

For suppliers, reverse factoring ensures fast payment, thus securing cash flow and reducing their need for working capital. For the buyer, it makes it possible to stabilize the supplier relationship, to negotiate better commercial conditions and to take advantage of a responsible approach in terms of payment terms.

The disadvantages relate to the cost of the system (in particular for suppliers if the commissions are re-invoiced to them) and to the complexity of implementation, which often requires close coordination between the buyer, the factor and a large number of suppliers. In addition, dependence on the reverse factoring program can become a subject of strategic negotiation in the business relationship.

6.3. Example: industrial sector and reverse factoring

In a long-cycle industrial sector (for example, aeronautics or naval), a contractor sets up a reverse factoring program for its main subcontractors in order to avoid cash flow tensions and the risk of failure. Suppliers can choose to be paid as soon as the invoice is issued by the factor, at costs that are often lower than those of a traditional credit thanks to the signature of the contractor.

This arrangement improves the resilience of the entire value chain, but requires careful negotiation of contractual conditions and everyone's responsibilities.

7. Deconsolidating factoring, IFRS standards and debt deconsolidation

7.1. What is deconsolidating factoring?

Deconsolidating factoring corresponds to factoring without recourse in which the factor actually assumes the credit risk, so that the receivables are taken off the company's balance sheet. The transfer is then qualified as “without recourse” in the economic sense: the company is no longer under an obligation to repay the factor in the event of the client's insolvency, subject to the exceptions provided for in the contract.

This accounting deconsolidation makes it possible to improve the presentation of financial statements, by reducing the accounts receivable and sometimes certain debt ratios, while securing future cash flows. It is particularly sought after by groups subject to financial covenants or high financial communication requirements.

7.2. What is debt deconsolidation in the sense of IFRS standards?

Under IFRS standards, the deconsolidation of a financial asset (in this case, a customer claim) in principle implies the substantial loss of the risks and benefits associated with this asset, as well as the transfer of control to a third party. In the context of factoring, this implies that the factor bears most of the risk of non-payment and that the company does not maintain significant guarantees that could lead it to rebuild the debt on the balance sheet.

If these conditions are not met (for example, in the case of significant recourse, repurchase guarantees or loss support clauses), the claims may have to remain on the balance sheet, even in the presence of a factoring contract. Accounting qualification requires a case-by-case analysis, in coordination with the auditors.

7.3. Deconsolidating factoring and debt deconsolidation

We speak of debt deconsolidation when the factoring operation leads to the exit of the assigned receivables and, correlatively, to the disappearance of the corresponding debt in the financial statements. The company is then no longer exposed to the risk of non-payment, which justifies no longer accounting for the claim in the social accounts, subject to compliance with accounting criteria and IFRS.

This treatment can significantly influence the solvency indicators used by banks and investors to assess the financial situation of the company. It must therefore be anticipated in the structuring of factoring contracts and documented in the accounting plan.

8. Dailly sale and factoring: differences, advantages and disadvantages

8.1. What is the Dailly sale?

The Dailly transfer is a legal mechanism for the transfer of professional claims to a credit institution, formalized by a form in accordance with the requirements of the Monetary and Financial Code. It allows a company to mobilize its trade receivables with its bank, which pays the corresponding funds, generally in the short term.

Dailly is a classic cash financing tool, often used on an ad hoc or recurring basis, depending on needs and available credit lines. It does not necessarily involve collection by the bank, nor insurance of customer accounts.

8.2. Difference between Dailly sale and factoring

The main difference lies in the nature of the service: factoring combines financing, collection management and possibly coverage of the risk of non-payment, while the Dailly sale is essentially a financing mechanism. In a factoring scheme, the factor intervenes in a more integrated way in the management of the accounts receivable, which is generally not the case with the bank in a Dailly.

In addition, the cost structure differs: factoring includes service and financing commissions, while Dailly is based on a discount cost and sometimes ancillary costs, often slightly lower than those of factoring. However, the degree of flexibility and the depth of service are more important in factoring.

8.3. Advantages and disadvantages of the Dailly sale

Among the advantages of the Dailly sale, we note its relative administrative simplicity (a transfer form is sufficient), the speed of access to funds (24 to 48 hours in practice), and good acceptance by customers, who see it as a traditional banking process. It also makes it possible to optimize cash flow without upsetting the internal organization of receivables management.

The disadvantages lie in the fact that Dailly does not eliminate the risk of non-payment, which remains borne by the company, and that the bank may refuse certain claims or reduce the lines in the event of a deterioration in the borrower's financial situation. The cost can also become significant if the draws are frequent or prolonged.

8.4. Which tool should you choose: factoring or Dailly?

For a company with a structured credit department and a solid customer portfolio, Dailly can be a flexible and often less expensive financing tool. On the other hand, for a structure that wishes to outsource the management of accounts receivable and protect itself against the risk of default, factoring seems more suitable despite a higher potential cost.

The choice will depend on several parameters: customer risk profile, need for debt collection services, importance of coverage against unpaid debts, balance sheet constraints (possible deconsolidation), balance of power with the bank and factors. A tailor-made analysis, integrating numerical simulations, is often necessary.

9. Practical box: example of a clause to be negotiated in a factoring contract

For purely illustrative purposes, a clause relating to the risk of non-payment can be structured as follows (to be adapted and legally secured on a case-by-case basis):

“The Factor guarantees the Seller the payment of the assigned claims up to the percentage of coverage defined under the particular conditions, in the event of proven insolvency of the Debtor, as defined in this contract. Unpaid payments resulting from a commercial dispute, compensation opposed by the Debtor due to claims relating to the service or the product, or those resulting from a contractual breach attributable to the Seller are not covered by this guarantee. In the event of the occurrence of such an event, the Seller undertakes, at the first request of the Factor, to buy back the disputed debt at the transfer price, plus any costs incurred by the Factor.”

The practical challenge is to precisely define the cases in which the factor may require the repurchase of claims and to ensure that warranty exclusions do not detract from the protection expected by the company. An audit of the factor's general terms and conditions and their relationship with your commercial contracts is decisive here.

10. FAQ — Factoring: frequently asked questions from managers

10.1. What are the disadvantages of factoring?

The main disadvantages of factoring lie in its cost, which is sometimes higher than conventional bank financing, in the complexity of contracts and in the possible impact on customer relationships. In addition, operational constraints (adaptation of processes, reporting to the factor) and the risk of misevaluating the real scope of the guarantee without recourse, in particular in the event of a dispute over services.

10.2. What are the benefits of factoring?

The main benefit of factoring is to quickly improve cash flow by transforming invoices into cash, while outsourcing collection management. It also makes it possible to secure the risk of client insolvency in contracts without recourse and, where appropriate, to optimize the presentation of the balance sheet via deconsolidating arrangements.

10.3. How does factoring work?

You assign your trade receivables to a factor, who immediately pays you part of their amount, usually between 80 and 95%, and then takes care of the collection from your customers. At the due date, the factor collects the payments, takes its commissions and pays you any balance.

10.4. What are the factoring costs?

Factoring costs include a management fee and a financing fee, often expressed as a percentage of the volume sold, with overall rates that can be in a range of around 0.5% to 4% depending on the situation. Ancillary costs (file, lump-sum minimum, litigation costs) may be added, which justifies a careful reading of the offer.

10.5. What is online factoring?

Online factoring is a form of factoring operated via digital platforms that make it possible to assign invoices and obtain very fast financing, often in less than 48 hours. Data exchanges are automated and pricing is generally presented transparently, bill by bill.

10.6. What is reverse factoring?

Reverse factoring is a device initiated by the buyer to allow his suppliers to be paid earlier by a factor, the buyer then paying the factor at the due date. It improves suppliers' cash flow and secures the supply chain, while allowing the buyer to control payment terms.

10.7. What is deconsolidation?

Deconsolidation refers to the removal of an asset or debt from consolidated financial statements when the associated risks and benefits are no longer borne by the company. In the context of factoring, it occurs when the assigned receivables should no longer appear on the balance sheet because the factor really bears the risk.

10.8. What is deconsolidating factoring according to IFRS standards?

Deconsolidating factoring under IFRS corresponds to a scheme in which receivables are derecognised, the company having transferred control and most of the risks and benefits to the factor. The contract is then analyzed as a real transfer without recourse, and not as a simple financing backed by receivables.

10.9. What is debt deconsolidation?

Debt deconsolidation occurs when, following a sale transaction (such as deconsolidating factoring), the company no longer has to recognize the corresponding debt in its consolidated accounts. This leads to an apparent improvement in its debt and solvency ratios.

10.10. What are the two main types of factoring?

A distinction is mainly made between recourse factoring, in which the company remains liable in the event of non-payment, and non-recourse factoring, in which the factor assumes the risk of customer insolvency. In addition to this distinction, other variants exist, such as confidential factoring or online factoring.

10.11. What is the difference between a Dailly sale and factoring?

The Dailly transfer is a mechanism for the transfer of receivables to a bank mainly for financing purposes, without overall management of the accounts receivable. Factoring, on the other hand, combines financing, debt collection and possibly credit insurance, with a greater level of integration but often at a higher cost.

10.12. How does the Dailly work?

You sign a debt transfer agreement with your bank and then give it Dailly slips listing the invoices transferred; the bank pays you the corresponding funds, minus its costs. Customers are informed of the transfer or the payments are contractually assigned to the bank according to the arrangement selected.

10.13. What are the pros and cons of selling Dailly?

The Dailly sale has the advantages of simplicity, quick access to funds and good acceptance by customers, with a generally moderate cost. On the other hand, it does not transfer the risk of non-payment and remains dependent on the assessment of your bank on your profile and that of your debt portfolio.

10.14. What is the Dailly?

Dailly is a French legal system allowing the simplified transfer of professional claims to a bank using a standardized form, in order to obtain short-term financing. It is part of the panoply of instruments for mobilizing receivables alongside discount and factoring.

10.15. BNP factoring: what does this term mean?

The expression “BNP factoring” refers to the solutions offered by the factoring entities of a large banking group, allowing companies to sell their receivables while benefiting from the solidity of a global banking player. These offers generally combine traditional factoring, export factoring, reverse factoring and online solutions, with pricing and terms negotiated on a case-by-case basis.

11. Comparison table (factoring vs Dailly sale)

12. A regulated field: the importance of being supported

The use of factoring, online factoring, reverse factoring or Dailly sale is part of a regulated banking and financial environment and at the crossroads of several areas: bond law, banking law, accounting, accounting, IFRS standards, risk governance. Each contractual arrangement has specific consequences in terms of liability, balance sheet, banking covenants and the management of commercial relationships.

It is therefore strongly recommended that you be assisted by a lawyer who masters these issues to analyze your contracts, secure key clauses, anticipate points of vigilance (deconsolidation, guarantees, remedies) and adapt the solution to your development strategy. Tailor-made advice is essential to prevent factoring, far from being a simple cash flow product, from becoming a source of underestimated legal or financial risks.

Article written by Guillaume Leclerc, lawyer in Paris, 34 Avenue des Champs-Elysées.