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What is a factoring company and what is its purpose?

What is a factoring company and what is its purpose?

Temps de lecture : 4 minutes

Looking for a way to finance your business, are you thinking of using a factoring company? Factoring is a financial technique that enables you to obtain immediate liquidity by transferring your customer invoices to a specialized company: the factoring company. But what does a factoring company do, and what is its purpose? We explain it all in this article.

Factoring company: what is it?

Before defining what a factoring company is, it's essential to first understand what factoring is. Factoring is a financial technique whereby a company transfer customer invoices to a specialized company for immediate financing . Also known as a factor, a factoring company is a financial institution offering factoring services. It is also known as factoring company.

In France, a factoring company must have obtained the validation by the Banque de France as a credit institution . In fact, the activities of factoring companies are governed by law. It is subject to precise specifications regulated by banking laws. Similarly, its remuneration is based on 3-month Euribor.

In addition to financing, the factoring company offers complementary services:

  • Trade receivables management. Factoring enables you to outsource the management of your company's accounts receivable: invoicing, reminders, etc.

  • Debt collection . Once the invoices have been financed, the factoring company collects the receivables from the company's customer.

  • Credit insurance to hedge against the risk of non-payment

Factoring companies can be subsidiaries of banking institutions. In fact, the largest banks in France have their own factoring subsidiaries. They may also be independent companies.

Why sell your invoices to a factoring company?

As a general rule, when a company issues invoices, it sets a deadline for payment. This is usually between 30 and 60 days. In the meantime, however, the company may need cash to pay suppliers or employees' salaries, for example.

Factoring helps to meet this cash flow requirement by provides immediate liquidity by transferring customer invoices. Factoring is therefore a technique for financing company invoices in advance. It enables recovery of between 70% and 90% of the amount of invoices assigned, the remainder being used to pay the factor's services.

So, although factoring may not enable you to recover all the sums owed, it remains an attractive technique for companies. In fact, it provides a lifeline for companies with long payment terms or urgent cash needs.

What's more, it's quicker to deploy than a bank loan, for example. In fact, factoring makes it possible to receive funds within 48 or 72 hours.

What advantages do factoring companies offer?

Using a factoring company offers many advantages:

Improving cash flow

Factoring is first and foremost a means of financing which provides immediate liquidity without having to wait for invoices to be paid. It can therefore be used to finance working capital requirements and cover operating expenses.

Thanks to the financing granted by the factoring company, the company can cover its usual expenses:

  • Supplier payment ;

  • Employee salaries ;

  • Investments ;

  • Etc.

And without having to go into debt.

Transfer the risk of non-payment

Once the invoices have been assigned, the factoring company is responsible for debt collection. It is therefore the factoring company that will have to bear the risks associated with customer insolvency or late payment.

It also allows you to benefit from complementary services to invoice financing :

  • Credit insurance ;

  • Accounts receivable and collection management.

Finally, it's a a financing method that does not generate debt for the company. That's the difference with bank credit.

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And the drawbacks?

Despite the considerable advantages of this technique, using a factoring company also has its drawbacks:

  • The conditions set by the factoring company are sometimes restrictive. It can set minimum amounts for assigned invoices. It can also set up long-term contracts, obliging the company to assign all its customer invoices.

  • Not all companies can make use of it. Factors exclude certain business sectors from their customer base. Companies whose activities require the use of several subcontractors are generally excluded.

  • The costs can sometimes be significant. The factoring company does not assign the full amount of the assigned invoices. It deducts its costs directly, as well as the sums intended for the constitution of a guarantee fund. On average, factoring companies pay out between 70% and 90% of the amount of invoices transferred.

  • Deteriorating customer relations . Once the invoices have been assigned, the company's customers are now indebted to the factor, and no longer to the company. The bond of trust can therefore be broken. The factoring company may be more intractable when it comes to debt repayment terms.

How to choose a factoring company?

Factoring is a financing method that is becoming increasingly popular with businesses. There are around twenty of them in France. So it's increasingly difficult to choose from among so many players.

Here's how to make the right choice:

  • Consider the factoring company's reputation . It's wise to choose a company with a certain number of years' experience.

  • Choose a factor with in-depth industry expertise . A factoring company that knows your business well will be more sensitive to your needs.

  • Take into account the customer portfolio . The factor must have a significant number of customers.

  • Pay attention to the speed of the approval process. It's best to choose a company with immediate financing capacity. Some companies take just a few hours to release funds. Others take several days.

  • Opt for a factor with a reduced guarantee fund requirement. All factoring companies require you to set up a guarantee fund. Choose a company that requires a reduced guarantee of between 5% and 15% of the amount of invoices assigned.

  • Pay close attention to the content of factor offers. Admittedly, it may make sense to choose a factoring company on the basis of cost. However, the differences are generally small from one factor to another. Instead, compare what each company has to offer. In other words, compare the additional services offered by each factoring company.

What's the alternative to factoring for immediate cash flow?

Faced with the many disadvantages of a factoring company, you have a choice alternative: Hero . It is a payment solution for businesses, offering payment facilities and an immediate advance on your customer invoices.

Here's how Hero works: once an invoice has been validated by the platform, it is sent to you. 80% advance within 24 hours . And yet, you can offer payment facilities such as the fractioned payment (in 3 or 4 instalments) and deferred payment (within 30 or 60 days) to your customers. And yet, there's no negative impact on your cash flow, as the funds are immediately disbursed by Hero.

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What's more, the platform's pricing system is completely transparent. In fact, it deducts only its costs and passes on the surplus where applicable, at the time of payment by the customer.

What's more, the transaction is completely confidential. The platform does not notify your customers. Unlike factoring, Hero does not jeopardize your customer relationships.

These advantages work both ways. You can also take advantage of these payment facilities to pay your suppliers. The platform also advances payment to the supplier.

In short, factoring is an invaluable ally for companies looking for fast, flexible financing. However, it is important to choose the right partner, as factoring is not without risks. Using a factoring company is not, however, an essential solution when you consider the advantages offered by our Hero payment solution.

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Écrit par

Valentin Orru

Head of growth