Factoring is one of the most powerful — and often misunderstood — tools available to companies operating in France. Used correctly, it allows businesses to outsource receivables management, protect themselves against unpaid invoices, and obtain immediate cash from outstanding customer debts. Used poorly, it can expose companies to unexpected costs, disputes, and recovery issues.
This article explains how factoring actually works under French law, what services a factor provides, how risks and guarantees are allocated, and why factoring plays a central role in professional debt collection.
1. What Is Factoring Under French Law?
Factoring is a contractual mechanism by which a company transfers its trade receivables to a specialized financial intermediary known as a factor. In exchange, the factor provides three core services:
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management of customer receivables,
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protection against non-payment,
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and, in most cases, short-term financing.
The transfer of receivables is not merely administrative. Ownership of the invoices is transferred to the factor through contractual subrogation, meaning the customers of the supplier become debtors of the factor rather than the supplier itself.
From that point onward, the factor becomes the party legally entitled to collect payment.
2. Why Factoring Contracts Are Always Exclusive
Factoring agreements are inherently exclusive. The company entering into the contract commits to offering either all of its invoices or a predefined portion of them to the factor.
This exclusivity is not a formality. It is fundamental to the factor’s risk model. Factors assess risk globally across a client’s customer base. Allowing a company to submit only “problematic” invoices would make risk diversification impossible and undermine the economic balance of the contract.
As a result, selective factoring outside the agreed scope is not permitted.
3. The Factor’s Preliminary Risk Assessment
Before accepting a client, every factoring company conducts a detailed review of the business. This analysis typically covers:
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total annual turnover,
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customer profiles and industries,
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average invoice amounts,
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contractual sales practices such as rebates or retention clauses,
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and short-term liquidity needs.
This due diligence explains why factoring is not simply a financing tool but a long-term operational partnership.
4. The Real Cost of Factoring
Factoring is not free, but its cost reflects the services provided and the risks assumed by the factor.
The primary cost is the factoring commission, which compensates the factor for credit analysis, receivables management, and payment risk coverage. This commission applies to the gross amount of invoices, including taxes.
In practice, commission rates typically range from 0.2% to 4%, depending on the factor, the volume of invoices, and the risk profile of the customer base.
Additional charges apply when the company uses factoring as a financing tool, which is the most common scenario.
5. Transfer of Invoices and Subrogation
Factoring operates through a true transfer of ownership of receivables. When a company submits invoices to the factor, it subrogates the factor into the corresponding claims.
Operationally, the factor opens a running account in the name of the client and credits it with the amount of invoices transferred. From an accounting perspective, multiple customer accounts are replaced by a single account held with the factor.
Submitting invoices for fictitious deliveries or services is a criminal offense and may constitute fraud.
Importantly, even in insolvency scenarios, ownership of receivables already transferred to the factor remains with the factor. Post-liquidation accounting adjustments do not constitute payment and do not deprive the factor of its collection rights.
6. Set-Off and Insolvency Risks
Debtors may still raise defenses against the factor under certain conditions. For example, if a customer held an enforceable claim against the supplier before subrogation occurred, legal set-off may defeat the factor’s claim.
Similarly, credits issued by a supplier after liquidation may not be enforceable by the factor, because only the liquidator may invoke the invalidity of acts performed after loss of control.
These rules are particularly relevant in contested debt recovery cases.
7. Transfer of Guarantees and Retention of Title
When an invoice transferred to a factor is secured by a guarantee, that guarantee follows the receivable. This includes retention-of-title clauses.
In practice, this means that a factor may recover goods delivered under a retention-of-title clause if the buyer enters insolvency proceedings.
However, the factor is also subject to the effects of retention-of-title claims exercised by suppliers of its own client, which can complicate recovery chains.
8. Protection Against Non-Payment: The Core Advantage
One of the defining features of factoring is the non-payment guarantee.
When the factor acquires an invoice and provides coverage, the supplier does not have to reimburse the factor if the customer ultimately fails to pay. The advance paid by the factor remains fully acquired.
This guarantee is not automatic. It depends on prior approval by the factor, which sets credit limits for each customer and defines the duration of coverage. These limits may be adjusted or withdrawn at any time based on financial indicators or changes in trading conditions.
Invoices exceeding approved limits or excluded from coverage may still be collected by the factor, but ownership does not transfer, and the supplier remains financially responsible.
Disputes relating to product quality, service performance, or technical issues are always excluded from the guarantee.
9. How Disputes Are Handled in Practice
When a customer raises a dispute, the factor issues a formal notice to the supplier. The supplier is then given a short period — typically around twenty days — to provide evidence and resolve the issue.
If the dispute is not resolved, the factor debits the supplier’s account for the disputed amount. This mechanism ensures that factors do not bear commercial risk unrelated to creditworthiness.
10. Mandatory Invoice Wording and Payment Instructions
To make factoring effective, invoices must clearly indicate that payment must be made directly to the factor. Without this wording, customers may validly pay the supplier instead.
If a customer pays the supplier despite proper notice, the factor may demand repayment from the supplier or require the customer to pay again.
If no subrogation notice appears on the invoice and the customer had no knowledge of the factoring arrangement, payment to the supplier remains valid and cannot be claimed a second time.
To remedy omissions, factors may directly notify customers of the transfer. From that moment on, only payment to the factor is valid.
11. Transmission of Invoices and Credit Notes
Suppliers must transmit copies of all invoices to the factor along with a subrogation receipt evidencing transfer of ownership.
Any credit notes issued after transfer must also be sent promptly. These must be accompanied by a specific reimbursement form indicating how the credit is to be settled.
Failure to transmit credits can expose the supplier to repayment claims.
12. Short-Term Financing Through Factoring
Most companies use factoring not only for risk protection but also for immediate liquidity.
The factor credits the supplier’s account and allows immediate use of the funds, without waiting for customers to pay. Contracts often include a retention reserve, blocking part of the credited sums to secure potential recourse.
International receivables may also be financed through forfaiting, which involves guaranteed foreign debts and eliminates cross-border payment risk.
13. Financing Costs and Interest Disclosure
Financing is remunerated through a specific financing commission calculated on the actual funds used and prorated over time. Interest rates are commonly indexed to the three-month Euribor.
Even though factoring is not technically a loan, French law requires disclosure of the effective annual rate when the supplier draws funds in advance. Failure to do so may result in interest being reduced to the statutory rate.
Additional charges may apply when financing is implemented through promissory notes.
Factoring fundamentally reshapes the debt-collection landscape. It determines who owns the claim, who has standing to sue, which defenses apply, and how insolvency affects recovery.
For recovery professionals, understanding factoring is essential to:
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assess enforceability,
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identify the correct claimant,
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manage disputes,
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and secure payment efficiently.
Whether you are a factor, a supplier, or a debtor facing a factoring claim, recovery requires precision and legal expertise.
Debt Collection France assists clients in enforcing factored receivables, managing disputes, and navigating insolvency-related challenges.
Our team of French qualified debt collection lawyers helps you secure your receivables and maximize recovery under French law.
