Researchers at the French National Research Institute for Sustainable Development (IRD), Eve...
Factoring is a solution that enables businesses to finance and continue their activity by capitalizing on their receivables.
The solution combines three main services:
- Financing of invoices,
- Managing cash flows, reminders and collections,
- Guarantees against unpaid invoices.
In concrete terms, businesses sell their customer invoices to a financial organization, known as the “factor”, in exchange for the corresponding liquidity, without having to wait for the contract deadline.
Factoring is a simple financing technique that businesses of any size and from any industry can use under one condition: the must serve business customers (i.e. BtoB).
Invoices converted immediately into liquidity
The way it works is that each business and factor signs a factoring contract, which sets terms for the sale of the invoices.
Customers must be approved in advance, in order to determine the guarantee level and the total financeable amount for invoices sold to the factor.
As soon as the contract is signed, the business can submit its invoices to the factor and receive the corresponding cash amount immediately, minus any fees outlined in the contract. The factor is then responsible for collecting payment when the invoice comes due.
Management and financing fees
The factor deducts fees from each invoice in order to cover the following expenses:
- a service commission (covering management expenses and the cost of reminder or collections actions),
- a financing commission, applied to each financed invoice for the period until the invoice due date,
- a contribution to a guarantee fund, created to hedge the risk of unpaid invoices, and calculated based on the amount of each invoice. No further contributions are required once the fund is complete.
Please note: the guarantee fund is returned by the factor in the event of the termination or nonrenewal of the factoring contract.
Numerous advantages for businesses
With factoring, businesses can secure their receivables and receive liquid cash immediately upon issuing each invoice, without waiting for the payment due date, regardless of the payment conditions negotiated with the customer.
But factoring delivers other advantages, as well:
- businesses can eliminate any administrative tasks related to collections, thus saving time to focus their efforts on their customers,
- businesses can protect against the risk of unpaid invoices, which is taken on by the factor.
Such advantages are winning over a growing number of French businesses. In France, the total amount of factoring transactions in 2014 reached 226,598 million euros, representing a growth of 13% compared with 2013. International transactions only account for 25% of that total, but grew by 47.5% over the previous year.
Factoring: a highly concentrated market in France
- The French factoring market comprises 14 specialized establishments, with the 5 leaders – BNP Paribas Factor, Eurofactor, CGA, Natixis Factor, and General Electric – executing 80% of all factoring transactions in France.
- However, the French factoring market is only the second largest in Europe, behind the United Kingdom but ahead of Italy and Germany.
- Europe accounts for about 60% of factoring revenue worldwide and has demonstrated strong growth rates, which has compelled industry leaders to structure the market. The 1st EU Factoring & Commercial Finance Summit took place in January 2015 and gathered 150 participants from 33 countries to discuss the evolution of the factoring market in Europe. The 2nd summit will take place in January 2016 in Brussels.
Credit insurance: one service provided by factoring
Factoring can help businesses fully outsource their accounts receivable. But businesses that only want to protect against the risk of unpaid invoices, without financing their receivables, can opt for a credit insurance service.
Akin to a “light” version of factoring, credit insurance only springs into action in the event of unpaid invoices, and may cover up to 100% of the invoice amount. It includes follow-up and management of late fees and collections costs.
Choosing a factoring partner with care
Factoring companies serve as key partners to businesses: by stabilizing their cash flows and guaranteeing their customer portfolios, they help to consolidate all business operations.
That’s why businesses must take care to choose a strong and reliable partner, especially for any international activities.
In turn, factors need to analyze and understand the needs of each customer in order to propose adapted solutions from among the available services.
BNP Paribas Factor offers solutions in the domestic and international markets for its customers based in France, from its “all inclusive” plan (with the possibility of combining up to three services) to its reverse factoring solutions for the biggest organizations.
BNP Paribas Factor was designated as the Best Import-Export Factor for 2014 and 2015, by winning the Grand Prize from FCI (Factors Chain International).
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