Undisclosed factoring: the appeal of discretion
Over the past ten years, more and more companies have turned to factoring to manage cash flow and benefit from additional financing capacity. Yet this financing technique is still wrongly perceived as a solution reserved for distressed companies. To overcome this stigma, factors have developed a solution particularly popular with large corporates: undisclosed factoring. This structure accelerates invoice payments without customers being aware of the supplier’s factoring arrangement – a discreet mechanism that helps preserve the company’s image.
No, factoring is not a financing tool reserved for companies on the brink of collapse. Although this perception persists, most businesses use factoring to better manage liquidity, support growth, and access additional financing lines.
To understand this, it is important to first define factoring. By assigning receivables to a specialised financing company, businesses accelerate invoice collection. The company sells its invoices to a factor, which immediately advances the funds. This improves cash flow and creates an additional financing source, generally less expensive than a bank overdraft. Another major advantage is that this funding does not reduce the company’s borrowing capacity for future growth projects.
“In 2022, invoices financed through undisclosed factoring represented €176 billion, or 66% of the factoring market.”
Over the past decade, factoring volumes have expanded significantly, from nearly €200 billion in purchased receivables in 2013 to €432 billion in 2023. “Factoring has become a mainstream financing solution suitable for companies of all sizes, credit profiles, and situations, provided they operate in B2B,” notes Philippe Pougeard, Deputy CEO of Société Générale Factoring.
Nevertheless, some executives still associate factoring with financial distress. Companies using it often prefer to remain discreet in order to protect their image or avoid requests for discounts from customers. To address this issue, undisclosed factoring has become widespread among large corporates, mid-sized companies, and more structured SMEs. In 2022, undisclosed factoring represented €176 billion in financed invoices, accounting for 66% of the market according to the French Association of Financial Companies.
Fewer services, lower cost
The principle is straightforward: “In undisclosed factoring, the factor does not notify buyers of its involvement. The factor operates on behalf of the company, but its name never appears,” explains Marc Bonnemains, Deputy CEO in charge of development at BPCE Factor. Technically, the payment account remains in the company’s name, but the dedicated collection account is pledged to the factor. The account legally belongs to the company, while the funds are swept to the factor each evening. This enables the factor to secure repayment of advanced invoices.
Another key difference is operational. In traditional factoring, the factor manages collections and may directly chase debtors. In undisclosed factoring, the company continues to manage its own receivables ledger and collections process. Because fewer services are included, undisclosed factoring is generally less expensive.
However, this non-notified structure also has drawbacks. It can be less comfortable for the factor. “With traditional factoring that includes the three standard services – invoice financing, bad debt protection, and receivables management – the factor communicates directly with buyers and gains visibility into payment delays or disputes. This is not the case in undisclosed factoring,” explains Philippe Pougeard. As a result, the factor has less visibility and control over risk.
Reserved for structured companies
For this reason, undisclosed factoring is not accessible to all companies. Factors apply eligibility criteria based on company size and financial health. Smaller businesses, typically with less than €7 million in revenue, are generally not eligible.
“Undisclosed factoring is mainly designed for structured companies with strong accounting and collection departments,” explains Marc Bonnemains. “We need to ensure the company can conduct invoice audits with customers, follow administrative procedures, and manage an efficient payment and collection process.”
“Smaller companies (with less than €7 million in revenue) are generally not eligible for undisclosed factoring.”
Access to undisclosed factoring therefore requires a thorough “factorability” assessment. Factors analyse the quality of the receivables portfolio, the financial health of the company, internal banking ratings, and operational processes. “We review the client’s procedures, business model, invoicing quality, and receivables,” adds Cécile Dauthier, Head of Commercial Development at Crédit Agricole Leasing & Factoring. “By principle, we only finance receivables that are certain, liquid, and due – that is, indisputable. When the factor is not sufficiently comfortable leaving full control to the client, we can propose adapted solutions such as line-by-line monitoring to ensure closer operational oversight.”
Confidentiality is never guaranteed forever
In all cases, companies should compare offers carefully. “Not all providers have the same approach to confidential structures,” explains Cédric Turquois, Sales Director at Factofrance. “At Factofrance, we primarily analyse the quality of the receivables portfolio, including payment delays, dispute levels, and credit note ratios.”
Most importantly, companies should understand that confidentiality is never fully guaranteed. It can be revoked if the company’s financial situation deteriorates significantly. “In that case, the factor does not necessarily stop financing, but it takes back control,” explains Romain Chaufour, Development Director at Fibus. Buyers are then informed that invoices must be paid directly to the factor.
Intermediate solutions may nevertheless exist. “Even when confidentiality is lost, some contracts still allow the company to retain operational management responsibilities such as reconciliations, collections, reminders, and recoveries,” Romain Chaufour adds. Another possibility is terminating the contract altogether, although distressed companies rarely choose this option since they generally prefer to maintain financing.
Non-recourse factoring: improving financial ratios
This is the second major innovation that has significantly contributed to the growth of factoring in France. Non-recourse, off-balance-sheet factoring is an effective mechanism for improving leverage ratios and reducing days sales outstanding. The principle is to permanently derecognise receivables by transferring the associated risk to the factor, thereby reducing the level of accounts receivable on the balance sheet. This accounting treatment eliminates the drawback of recourse factoring, which mechanically increases debt levels.
Most contracts of this type are used by listed companies carrying out off-balance-sheet assignments at quarterly or annual closings. Non-recourse factoring is also common in leveraged buyouts (LBOs), as it improves financial leverage ratios. “LBO-backed companies operate under leverage thresholds they cannot exceed. Off-balance-sheet factoring enables them to access additional financing without increasing leverage,” explains Philippe Pougeard.
However, these transactions are tightly regulated. For factoring to qualify as off-balance-sheet, the factor must not be able to return ownership of the receivables. The assignment must therefore be without recourse. “Statutory auditors are the ultimate decision-makers,” notes Romain Chaufour. “Recently, they have become increasingly demanding when validating the off-balance-sheet nature of factoring programs. Discussions are longer. Achieving derecognition under French GAAP is easier than under IFRS or US GAAP.”
Off-balance-sheet factoring, heavily used in recent years, experienced a slight decline alongside the broader slowdown in the factoring market at the end of 2023. “With three-month Euribor approaching 4%, some large corporates reduced or suspended their derecognition programs. This decline impacted overall market volumes,” analyses Romain Chaufour.
Source: Le Nouvel Économiste