What is factoring?

Factoring is a financing technique used by a company to transfer its receivables from its customers to a third party, called a factor, in exchange for an instant cash advance. This same third party then takes charge of recovering debts from the company’s customers, who can thus have immediate liquidity without having to wait for payment from customers. In return, the company undertakes to reimburse the third party with the funds recovered, adding a commission called a discount. This varies depending on the recovery period of debts and the risk of failure of the company.

Who is this third party responsible for factoring?

This is usually a factoring company, called a factor. This company specialises in the management of commercial debts and takes care of the recovery of debts assigned by the company as well as the management of possible disputes. The factor can be an independent company or a subsidiary of a bank or insurance company. It is chosen by the company that wishes to benefit from factoring based on criteria such as the prices offered, the quality of the service, the reputation of the company and the quality of its network of relationships.

The different stages of factoring

Preparing for the assignment of receivables

The company that wishes to benefit from factoring must select the receivables it wishes to assign and prepare the necessary documents (invoices, contracts) in order to prove the existence and validity of the receivables.

Negociation with the factor

The company negotiates with the factor the conditions of the operation (amount of receivables assigned, recovery period, commission rate). It must also ensure that the factor has a good network of relationships as well as a good reputation to best manage the receivables.

Assignment of receivables

The company transfers its receivables to the factor in exchange for an advance on the amount of the receivables. The assignment is generally carried out by signing a factoring contract.

Receivables recovery

The factor takes charge of recovering debts from the company’s customers. He can use various recovery techniques (telephone reminders, letters, formal notices) to obtain payment of the assigned debts.

Reimbursement of advance and commission

When the receivables are paid by the clients, the factor reimburses the advance it has granted to the company, adding the commission provided for in the factoring contract. The company thus has immediate liquidity without having to wait for payment from its customers.