Factoring in France: legal framework and disputes

Any SME facing long payment terms eventually hears about factoring. The solution is attractive on paper: you assign your invoices to a financial institution, it immediately advances you most of the value, and it then collects the sums from your clients. The immediate cash need is covered, the risk of non-payment is transferred, and the business preserves its team’s energy for core activities rather than chasing invoices.

This guide explains factoring in all its detail, from the simplest legal definition to the most subtle pitfalls. It addresses the executive comparing factor proposals who wants to know what they are signing, the in-house counsel preparing a framework agreement, and the lawyer acting for an adherent in difficulty. Factoring is not merely an accounting financing tool: it is a dense contract touching on the civil law of subrogation, the banking law of the Dailly assignment, commercial evidence law, insolvency proceedings and, increasingly, private international law.

What is factoring?

Factoring – called “affacturage” in French law – is a short-term financing technique by which a business (the adherent) transfers its trade receivables to a financial institution (the factor). In return, the factor pays the adherent an advance, manages collection from debtors and usually guarantees payment in the event of debtor insolvency. Three services, one contract, three parties: the adherent who assigns, the factor who acquires, the assigned debtor who will pay the latter.

French positive law does not provide a specific statutory regime for factoring. Operators use two general-law techniques to effect the transfer: personal subrogation under the Code civil and the professional receivables assignment (cession Dailly) under the Code monetaire et financier. These two mechanisms have different regimes, and the choice between them – or their combination – is an essential contractual arbitrage conditioning the robustness of the operation in the event of dispute.

The Cour de cassation has characterised the factoring contract as an innominate contract, synallagmatic, with successive performance, marked by strong intuitus personae, combining elements of credit, commercial management and payment guarantee. It is a sui generis contract escaping traditional categories.

It is distinguished from discounting (escompte), which rests on a negotiable instrument and leaves the bank a cambiaire recourse against the remitter in case of non-payment. The factor, by contrast, acquires the receivable outright and, for approved receivables, waives recourse against its adherent. For a full analysis of the discounting mechanism, see our guide to discounting.

It is distinguished from a mandate: a collection mandate leaves the receivable in the creditor’s estate; the factor becomes owner. And from credit insurance: the insurer indemnifies at a percentage after a waiting period; the factor often settles 100% immediately and adds management and collection services.

How factoring works

A factoring operation follows a stable sequence:

Framework agreement: The adherent and factor sign a master agreement fixing all future terms – eligible receivables, financing ceiling, commissions, factor’s approval power, guarantee retention, recourse clauses, current account operation.

Assignment of receivables: Each invoice is transferred via subrogation (with contemporaneous subrogative receipt) or Dailly bordereau. The adherent is typically bound by a globality clause prohibiting cherry-picking – ensuring the factor can mutualise risk.

Notification to the assigned debtor: The client must know that their debt has changed creditor (except in confidential factoring). The subrogation mention appears on each invoice: only payment to the factor is dischargeable. The Cour de cassation has held that a debtor paying the original creditor in knowledge of the subrogation does not discharge their obligation (Cass. com., 15 October 1996, no. 94-16.302).

Approval: The factor retains discretion to refuse certain receivables deemed too risky. Approved receivables benefit from the guarantee; unapproved ones are merely managed under a collection mandate.

Advance financing: For approved receivables, the factor immediately advances 80-90% of the net amount, with the balance held in a guarantee retention. The current account records reciprocal remittances on a running basis.

Collection: At maturity, the factor collects directly. For approved receivables, the guarantee operates: the factor bears the default and does not pursue the adherent.

Subrogation or Dailly assignment: two legal techniques

Personal subrogation (Articles 1346 and 1346-1 Code civil): The factor pays the adherent and, by operation of payment, acquires the original creditor’s rights against the debtor. The transfer requires a contemporaneous subrogative receipt. The factor receives rights exactly as they existed in the adherent’s estate – nemo plus juris. Consequence: full opposability of defences – anything the debtor could oppose to its supplier, it can oppose to the factor (breach of contract, defective conformity, set-off for connected debts).

Dailly assignment (Articles L. 313-23 to L. 313-35 CMF): Created by the law of 2 January 1981, it allows a credit institution to receive professional receivables by simple remittance of a bordereau with strict formal requirements. Key advantages: opposability to third parties from the date on the bordereau; authorisation of global assignment of existing or future receivables; better traceability in evidence disputes.

Most factoring framework agreements combine both: subrogation on a running basis, backed by Dailly bordereaux as additional evidence and security.

The framework agreement

The framework agreement is the nerve of the operation. Its clauses determine the entire economic and legal balance. Key elements include:

Adherent’s obligations: Assign all receivables (globality clause), provide complete information on clients and own financial position, notify transfer to debtors, guarantee the existence of assigned receivables. Case law severely sanctions assignment of fictitious or disputed receivables.

Factor’s obligations: Pay approved receivables, guarantee performance (100% for approved receivables), manage client accounts and collect. The distinguishing feature of factoring, separating it from discounting, is the absence of recourse against the adherent for approved receivables.

Remuneration: The factoring commission (0.5-2.5% of invoice amounts) covers management, collection and guarantee. The financing commission (approximately two points above base rate) covers the advance. Total effective cost generally runs between 1.5% and 4% of turnover entrusted.

Current account: Records reciprocal remittances on a running basis. Entry into account operates as payment. The Cour de cassation validated set-off through the current account mechanism (1 March 2005, 19 April 2005).

Guarantee retention: Typically 10-20% of assigned receivables, blocked in a separate account, returned at closure after settlement of accounts.

Factoring formulas

Full factoring (traditional): Combines all three services – advance financing, client account management and guarantee. Most complete and most expensive.

Maturity factoring: Eliminates the advance; the adherent waits until normal maturity but benefits from management and guarantee against insolvency.

Without recourse / with recourse: In the “without recourse” version, the factor bears the full insolvency risk. In “with recourse”, it retains the right to pursue the adherent. The latter is cheaper but offers no protection.

Confidential factoring (undisclosed): Preserves the commercial relationship by not notifying the debtor. Avoids negative signalling but weakens the legal security of the transfer.

Reverse factoring (supply chain finance): Initiative comes from the debtor (typically a large company) enabling its suppliers to be paid immediately by a factor. Raises specific issues in the debtor’s insolvency regarding potential recharacterisation as bank debt.

Legal risks

Opposability of defences: The assigned debtor may invoke against the factor any defence available against the original supplier: breach of contract, non-conformity, exception of non-performance, set-off for connected debts. The factor acquires the receivable with its qualities and its vices.

Conflicts with third-party creditors: The factor may compete with prior Dailly assignees, seizing creditors, retention-of-title beneficiaries, or sub-contractors. Priority rules depend on the transfer method and the date of opposability.

Fictitious receivables: The adherent who assigns fictitious or disputed receivables engages its contractual liability. The factor has a conventional recourse and may claim reimbursement of advances plus penalties.

Factoring and insolvency proceedings

Insolvency of the adherent: Receivables regularly transferred before the opening judgment escape the collective estate – the factor remains owner (confirmed for receivables arising from contracts in the course of performance). The suspect period (between cessation of payments and judgment) is a risk zone, but the Cour de cassation held (17 June 1980) that transfers to the factor are not payments by the adherent and thus escape mandatory nullity under Article L. 632-1. The contract may be continued by the administrator despite its intuitus personae character (8 December 1987). The factor must declare its own claims within two months of BODACC publication.

Insolvency of the assigned debtor: The factor must declare receivables acquired from the adherent. The debtor in insolvency retains the right to oppose all defences inherent to the receivable.

International factoring

International factoring is governed by the Ottawa Convention of 28 May 1988 (Unidroit), ratified by France. It validates assignment of future receivables and overrides contractual non-assignment clauses (though France has reserved on this point for debtors established in France). The system typically involves two factors – an export factor and an import factor – collaborating within a chain organised by Factors Chain International (FCI). Cost is higher than domestic factoring (0.5-3%) due to the two-factor structure and additional risks.

When to engage a lawyer

Four situations typically warrant intervention: negotiating a framework agreement (rebalancing desequilibrated clauses, anticipating exit scenarios); disputes on opposability of defences (analysis at the intersection of obligations law and commercial law); articulation with insolvency (ownership of assigned receivables, timely filing, revendication, current account set-off); and closure disputes (account rendering, balance calculation, guarantee retention restitution, exit penalties).

Solent Avocats acts at each stage, alongside adherent businesses, factors and assigned debtors. For the broader banking law context, see our comprehensive banking law guide and our banking and financial law practice page.