Factoring has become the main short-term financing source for French companies
Faster and cheaper than an overdraft, factoring enables companies to quickly access liquidity by selling their invoices to a specialised financial institution. Factoring has multiple uses and benefits: it helps increase a company’s cash flow, improves its financial presentation, and enables payments to be made internationally. However, not all companies can access it. Its implementation, made easier by digital tools, still requires human and financial resources as well as proper management. In addition, companies operating in sectors considered high-risk may struggle to find a factor.
Factoring is a solution that quickly converts invoices into cash. To meet companies’ working capital needs, it offers an alternative to bank lending. The principle is as follows: a company sells its receivables to a specialised provider, usually a subsidiary of major banking groups (Crédit Mutuel, BNP, Société Générale, etc.). The factoring company immediately advances the funds from the invoices to the business. It becomes the new owner of the receivables and bears the risk until they are collected.
This solution is widely used in certain industries, particularly consulting, where clients typically pay after 60 days while salaries – paid at the end of each month – represent the main cost for the business. In a context of inflation and rising raw material prices, factoring is also popular in manufacturing, where it finances customer portfolios and provides immediate liquidity.
Cheaper than an overdraft
Of course, this service is not free, but despite its cost, French companies are increasingly using it. It has even become the main source of short-term financing for businesses. In 2022, factors purchased the equivalent of €422 billion in invoices. Over ten years, the sector’s activity has increased 2.5 times in France, according to the French Financial Companies Association (ASF).
“The cost of factoring is lower than a traditional bank overdraft or revolving credit.”
The reason for this growth is that companies have understood a key point: factoring is significantly cheaper than a traditional overdraft facility or revolving credit. This advantage comes from a lower risk cost. For a bank subject to prudential regulations, trade receivables are difficult to assess and finance blindly. As a result, granting credit to SMEs involves financing a “living intangible asset” that constantly evolves as invoices are issued and paid. By purchasing invoices, factoring companies transfer the risk: the debtor is no longer the SME, but its customers – often large corporates or public institutions.
An additional source of financing
For companies, factoring has become an additional financing source, especially since it does not reduce their banking capacity. “The factor advances cash without reducing the company’s ability to borrow for long-term investment projects,” explains Marc Bonnemains, Deputy CEO in charge of development at BPCE Factor. Moreover, it enables faster access to significant amounts, whereas traditional bank credit lines require strong financial performance and annual accounts. “With factoring, the amount of financing can change several times a year depending on needs, which is particularly useful for fast-growing companies,” adds Gaëtan du Halgouët, CEO of the broker Fibus.
Factoring is also used to finance international receivables. “Companies involved in export often face payment terms of 90 to 120 days, which significantly increases working capital needs,” explains Guillaume Lanoë, International and Key Accounts Director at Factofrance.
“Factoring also serves another common purpose, supervised by auditors: by selling receivables, companies improve their financial statements.”
This accounting technique – known as deconsolidation, which removes assets or liabilities from the balance sheet to improve financial ratios – is frequently used by large corporates and mid-sized companies, notes Marc Bonnemains.
Dispelling misconceptions
While factoring used to be seen as a financing tool for struggling companies, this perception has changed. The rise of confidential factoring solutions, without customer notification, has played a major role in its development in France. “The company uses an account in its own name, and the debtor is not aware that a factoring company is involved,” explains Guillaume Lanoë of Factofrance. This simple approach helps preserve the company’s image.
“A key milestone in the development of factoring has been the creation of confidential, non-notified solutions.”
Delegating receivables management
“Not long ago, factoring was a very niche and complex tool, only justified for large volumes,” says Germain Simoneau of CPME. Digitalisation has made factoring easier to implement, although it still requires careful setup and monitoring. Companies can also delegate part or all of their receivables management to the factor or broker, including IT system integration, legal support for deconsolidation structures, contract management, and confidential collections and recoveries.
Not all companies are eligible
However, not every company can access factoring. It is limited to B2B activities and excludes B2C sectors. Even within B2B, eligibility depends on how invoices are structured. For example, in construction, interim invoices on incomplete projects are not always considered final receivables. “This does not make factoring impossible, but it does make factors more demanding regarding the company’s financial situation,” explains Gaëtan du Halgouët of Fibus. Insurance credit is also often required to protect against debtor insolvency, and companies may need to approach several providers before finding a suitable factor.
Which companies can access factoring?
Access to factoring is limited for certain types of activities or companies. Before moving forward, the factoring company or specialised broker will assess the “seller risk”, meaning the financial health of the company assigning its invoices. “This is a very bank-like assessment, similar to a loan evaluation,” explains Gaëtan du Halgouët of Fibus. The factor then focuses on the company’s customers: are they financially solid? Are they located in countries with payment risk? Do they meet credit insurance requirements?
The third category of risk assessed relates to the nature of the business itself. At this stage, the factor evaluates the risk of commercial disputes that could arise on invoices. Some activities involve very little risk, where delivery notes serve as clear proof and leave no ambiguity. Others are riskier. Contracts between toy manufacturers and large retailers, for example, often include unsold goods return clauses. In such cases, invoices are not fully final. After the holiday season, retailers may return unsold stock and the supplier issues credit notes. If the factor has financed 90% of the invoice and the company later issues a 20% credit note, the factor will have effectively over-financed by 10%, exposing itself to risk.
The same applies in construction, where projects may be incomplete and interim invoices are not yet definitively due. If the company is otherwise financially strong and its customers are solid, it may still be eligible for factoring. However, a company in weak financial health, with fragile customers and non-final receivables, will find it much harder to secure a factoring arrangement.
Qonto, the all-in-one fintech factoring solution
For small businesses and companies struggling to access factoring or short-term credit, new fast financing solutions are emerging. Founded in 2016, Qonto is an all-in-one platform offering SMEs, very small businesses, and freelancers tools to simplify day-to-day operations, including invoicing modules and accounting tools.
One year ago, together with fintech partners, Qonto launched a financial hub integrated into its platform. It includes various services: short-term financing, factoring, as well as “invoice financing”, a solution close to factoring. “We chose a hub approach to address all our clients’ financing needs,” explains Albertine Lecointe, Qonto’s Head of Strategy.
On the platform, financing amounts vary widely (from €500 to €10 million), as do repayment terms, ranging from a few months to two years. Above all, access is significantly simplified. “Our clients do not need to submit a specific application each time they use a financial service on Qonto. With their consent, their data is shared via an API between our different partners,” Lecointe adds. The goal is to make working capital financing simple, easy, and fast for small businesses.
To grant financing, Qonto’s partner Karmen commits to a 48-hour turnaround. This fintech relies on aggregated transactional data from clients’ bank accounts, retrieved via APIs. Artificial intelligence is used to detect fake invoices, suspicious financing requests, and errors, enabling the company to assess risk quickly and serve cases often rejected by traditional banks – such as small businesses or non-traditional sectors. “In just seconds, our calculation technologies and AI allow us to assess the risk of an SME across our products,” says Gabriel Thierry, co-founder and CEO of Karmen.
Source: Le Nouvel Économiste