Non-recourse factoring: more than a financing tool

When a factoring contract is called “non-recourse” for accounting purposes, accounts receivables on the balance sheet are reduced by the amount of the assigned receivables. Thus, accounts receivables are converted into cash without impacting the company’s debt level.

While the deconsolidating nature of a factoring programme has many advantages, it is not the norm for all companies using this type of financing. Furthermore, today, it is more often used by listed companies and mid-cap companies. However, more and more SMEs are now accessing it.

• DSO (days sales outstanding) and WCR (working capital requirement) are significantly reduced. The company then has the cash to finance its organic or external growth.
• Improved leverage ratio (net debt/EBITDA) and financial autonomy ratio (net debt/equity) ratio.

For a contract to be “non-recourse”, it must comply with one fundamental rule: the factor must bear the majority of the credit risk of the receivables purchased. This means that the factor must bear any unpaid invoices due to legal proceedings (receivership, judicial liquidation, etc.) but also bear any delays in payment from customers. The invoices must not be refundable by the company transferring them. To accept this transfer of credit risk, factoring companies rely on credit insurance. The deconsolidated receivables are therefore limited to the insured amounts.

Nevertheless, the absence of recourse on the credit risk does not mean that the factor has no recourse on the assigned receivables! Quite the contrary, other type of recourses exist (disputed receivables, VAT, etc.) and remain contractual. They lead to a detailed analysis of the factoring contract and the credit insurance policy by the auditors of the assigning company.

The transfer of customer risk to a factor requires that it accepts the risk and that it is covered by a credit insurer. Thus, the factor is more demanding on the quality of the credit management of the assigning company, from the clients’ selection to the collection processes. As with any factoring or credit insurance contract, the more that the customer risk is controlled, the more the programme will be optimised.

Consequently, the portion of trade receivables that can be deconsolidated is limited to:

• The outstanding amounts covered by the credit insurance at the time of the transfer of accounts receivables
• The portion of business subject to possible disputes / returns of goods / various discounts / specific invoicing processes, which reduces the receivables eligible for deconsolidation.

The factor or credit insurer therefore always has the option to exclude a very poor payer, even if this decision cannot have a retroactive impact on receivables already assigned without recourse. **It is therefore advisable for the company to continue and even strengthen its management of trade receivables to optimise its rate of receivables assigned without recourse, and thus obtain the maximum benefit from its deconsolidating factoring programme.
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Today, deconsolidation operations are the main source of growth in the factoring market. All factors and credit insurers have adapted their contracts to the requirements of the major auditors. But there are many areas of disagreement, and each contract can be negotiated at length between the parties. This trend is even more evident at Fibus: 80% of our specifications in the tender phase include deconsolidation as an essential criterion for the company. Incidentally, we regularly encounter the same auditors in our negotiations, which often facilitates discussions!

In addition, we have gained experience working with French companies but also for international groups based in several countries, subject to IFRS and US GAAP.

It is obviously impossible to cover all the questions raised by deconsolidating factoring in a single article. Each contract is unique and adapted to the specificities of each company. In addition, each accounting standard requires a different analysis (IFRS, French GAAP, US GAAP, etc.). It is advisable to carry out a detailed study of your business and your accounts receivables to estimate your potential benefits from non-recourse factoring.

As a specialised broker, Fibus provides you with a dedicated team to studying, setting up and negotiating your factoring contract.

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