Everything you need to know about factoring
Factoring is a very effective way of financing a company's cash flow. Definition, how it works, fees, eligibility, forms and players: this complete guide helps you decide whether it is the right lever for your working capital.
1. Definition and principle of factoring
Factoring is a very effective way of financing a company's cash flow. It consists in obtaining immediate payment of a customer invoice whose due date is in the future (30, 45 or 60 days, or even more).
Concretely: instead of waiting for the customer to pay at the due date, a financial institution (the factor) advances most of the invoice amount to the company.
Simplified example
An invoice of €100,000
- An invoice of €100,000 is issued today with payment at 45 or 60 days.
- The factor immediately pays €90,000 (for example).
- At the due date, the customer pays €100,000 to the factor.
- The factor pays back the balance to the company, after fees: fees €3,000 · balance paid €7,000 · total collected €97,000.
➡️ The company gains cash immediately, but pays financing fees.
2. The players in factoring
Factoring involves three parties:
The supplier company
which issues the invoice
The debtor customer
which must pay the invoice
The factor
financial institution that advances the funds
The factor signs a framework agreement with the company to finance its invoices.
3. Advantages and disadvantages
Main advantages
- Immediate improvement in cash flow
- Reduction in collection times
- Reduction in working capital requirement
- Possibility to delegate collection
Main disadvantages
- Financing and management fees
- Administrative complexity (less true today)
- Recurring cost over time
The main benefit: receiving the money without waiting for the customer's due date. Today, many factors offer simple web interfaces to upload invoices, which greatly reduces the operational burden.
4. Factoring fees
Several types of fees may apply:
Financing commission
Often indexed to a reference rate (e.g. Euribor) + margin. Example: 3-month Euribor = 1%, contract Euribor + 2% → commission = 3% of the financed amount.
Management commission
For administrative management and collection.
Possible ancillary fees
- Set-up fees
- Annual fees
- Per-invoice fees
- Credit-insurance fees
➡️ Fees can add up: it is essential to negotiate well from the start.
5. Eligibility conditions for factoring
Factoring is not suitable for all companies.
5.1 No interest
- Immediate customer payment
- Late invoicing in the service
- Already fast collection
5.2 Poorly suited cases
- Long or complex services
- Unclear milestones (e.g. construction)
- Risk of customer disputes
- Contestable invoices
5.3 Favourable cases
- Customer terms > 30 days
- Clear and regular invoicing
- Low dispute rate
- Solvent customers
➡️ Factoring requires a clear, completed and indisputable service.
6. Importance of customer quality
The factor mainly analyses the customer risk. 👉 The more the customers are large, well-known and solvent companies, the more easily factoring is accepted.
Conversely, with fragile SMEs, companies in difficulty or insolvency proceedings ➡️ financing is difficult or impossible.
7. Financial operation of factoring
Once the agreement is signed:
- The factor generally advances 80% to 95% of the invoice amount.
- The customer pays at the due date.
- The factor pays back the balance less the fees.
8. The 3 forms of factoring
8.1 Classic (notified)
- The customer is informed
- It pays the factor directly
- The factor handles collection and reminders
👉 The company outsources customer management.
8.2 Confidential
- The customer is not informed
- It pays the company
- The company handles collection
👉 Commercial transparency preserved.
8.3 Notified managed (mixed)
- The customer knows there is factoring
- But pays the company
- The company handles collection
👉 Relational compromise.
Credit insurance possible
It is possible to add insurance against unpaid invoices on top of factoring.
9. Duration and set-up of a contract
- Typical duration: 2 years
- Renewal: tacit renewal
Operational deployment
The factor provides access to upload: invoices, purchase orders, delivery notes, acceptance reports, customer documents. These documents prove the reality of the service and the customer's ability to pay. The factor often uses a credit-insurance rating to assess the customer.
10. Start-up phase and audit
At the start, an audit phase exists. The factor analyses:
- customer balance
- forecast
- types of services
- customer profiles
- invoicing
Full set-up time: around 2 months for an operational agreement.
11. Players in the factoring market
Traditional banking players (France)
- Crédit Agricole Leasing & Factoring
- BNP Paribas Factor
- BPCE Factor
- Société Générale Factoring
- Crédit Mutuel Factoring
👉 More than 70% of the market.
Specialised fintechs
- Defacto
- Edebex
Characteristics: faster set-up, simpler fees, digitalised process. Once the solution is active: online invoice upload, fast analysis (a few days), immediate advance.
12. How to decide whether factoring is relevant
Key points to check:
- Long customer terms
- Clear invoicing
- Few disputes
- Solvent customers
- Cash flow need
If eligibility is good: ➡️ compare and negotiate the offers ➡️ choose between bank or fintech ➡️ optimise the fees.
13. Conclusion
Factoring is a powerful lever for financing working capital, particularly suited to companies with significant customer terms, clear invoicing and solid customers. The main advantage is the cash advance. The main disadvantage is the cost.
The recommended approach:
- Check eligibility
- Analyse the customers
- Compare the factors
- Negotiate the fees
- Choose the relational model
Used well, factoring can become a lasting tool for financing growth.
Frequently asked questions about factoring
What is factoring?
It is a way of financing cash flow: a financial institution (the factor) immediately advances most of a customer invoice with a future due date, then is repaid when the customer pays.
How much does factoring cost?
It depends on a financing commission (often Euribor + margin), a management commission and possible ancillary fees (set-up, annual, per invoice, credit insurance). Cost is the main disadvantage: it is negotiated from the start.
Which company is eligible for factoring?
Companies with customer terms over 30 days, clear and regular invoicing, few disputes and solvent customers. The factor mainly analyses the risk carried by the customers.
What are the forms of factoring?
Three main ones: classic (notified), confidential and notified managed (mixed), depending on whether the customer is informed and who handles collection. Credit insurance against unpaid invoices can be added.
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Factoring, debt, financing solutions: Collaboration Capital helps you compare banks and fintechs and negotiate the best conditions for your working capital.
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