Every SME faced with long payment times ends up hearing about factoring. On paper, the solution is attractive: you sell your invoices to a financial institution, which immediately pays you the bulk of the cash, and then collects the sums from your customers. The rapid need for cash is covered, the risk of non-payment is transferred, and the company conserves the energy of its team for its core business rather than for chasing up invoices.<\/p>\n
This guide explains factoring from every angle, from the simplest legal definition to the most subtle pitfalls. It is aimed at managers who compare the offers received from a factor and want to know what they are signing, company lawyers who prepare a framework agreement, and lawyers who act for a member in difficulty. Factoring is not just an accounting financing tool: it is a complex contract that touches on the civil law of subrogation, the banking law of Dailly assignment, the commercial law of evidence, the law of collective proceedings and, increasingly often, private international law. Each of these layers has its pitfalls.<\/p>\n
Factoring - known as factoring<\/em> is a short-term financing technique whereby a company, known as a member, transfers its trade receivables to a specialised financial institution known as a factor. In return, the factor pays the member in advance, collects the receivables from the debtors and, in most cases, guarantees payment in the event of customer insolvency. Three services, one contract, three players: the member who assigns, the factor who acquires, and the debtor who pays the factor.<\/p>\n The definition may be contained in a single sentence, but it conceals a peculiarity of French law: positive law does not enshrine a specific regime for factoring. The law has never taken the trouble to define the contract, list its conditions or organise its effects. In practice, operators use two common law techniques to transfer receivables: personal subrogation under the Civil Code and assignment of trade receivables under the Dailly Act. These two mechanisms have different regimes, and the choice between one or the other - or their combination - is an essential contractual arbitration that determines the soundness of the transaction in the event of a dispute.<\/p>\n The Cour de cassation has had occasion to describe factoring contracts as innominate, synallagmatic, successive performance contracts, marked by a strong intuitus personae and combining elements of credit, commercial management and payment guarantees. It is often referred to as a sui generis<\/em> which falls outside the traditional categories. In practice, this classification is important because it clearly distinguishes factoring from three related transactions with which it is often confused.<\/p>\n Firstly, it differs from\u2019discount<\/strong> bank. Discounting is based on a commercial paper - a bill of exchange or promissory note - and gives the bank recourse against the remitter in the event of non-payment. The factor, on the other hand, buys the debt firmly and, for approved debts, waives all recourse against its member in the event of the debtor's default. The difference in legal structure brings with it a decisive practical difference: in discounting, the risk of insolvency remains with the company; in traditional factoring, it passes to the factor. For a complete study of the mechanics of discounting, see our guide to discounting<\/a>.<\/p>\n It is then distinguished from mandate<\/strong>. A collection mandate leaves the debt in the creditor's hands; the agent acts in the creditor's name and on the creditor's behalf. The factor, on the other hand, becomes the owner of the debt. The financial consequences are radically different: in the event of insolvency proceedings against the member, the debt assigned to the factor does not form part of the debtor's assets and escapes the collective ownership of the creditors.<\/p>\n Finally, it differs from\u2019credit insurance<\/strong>. The credit insurer indemnifies the insured for a percentage - rarely more than 90 % - after a waiting period, in exchange for a premium. The factor often pays 100 % of the approved debt, immediately, and also includes management and collection services that the insurer does not offer. Credit insurance simply covers the risk; factoring finances, manages and covers at the same time.<\/p>\n In practice, a factoring transaction follows a stable sequence that all managers should have in mind before signing. Knowing this means you can understand what the factor does, when, and under what conditions. It also enables you to spot the sticking points that can lead to disputes down the line.<\/p>\n First stage signature of the framework contract<\/strong>. The member and the factor sign a framework agreement accompanied by a technical manual setting out the terms and conditions. The agreement covers all future transactions, including the identification of eligible receivables, the financing ceiling, commissions, the factor's power of selection, the holdback, recourse clauses and the operation of the current account. The contract is generally for an indefinite period, and article L. 313-12 of the French Monetary and Financial Code requires a minimum notice period of sixty days for any termination (set out in article D. 313-14-1). Even before the first settlement, this initial negotiation determines the profitability and legal security of the entire future relationship.<\/p>\n Second stage assignment of receivables<\/strong>. Each time the member invoices a customer, it remits the invoice to the factor. Depending on the technique used - subrogation or cession Dailly - the remittance is accompanied by a concomitant subrogation receipt or a Dailly slip showing the date of cession. In principle, the member undertakes to assign all its receivables to the factor - this is known as the globality<\/strong>, which prohibits cherry picking<\/em>. This obligation is not a style clause: it enables the factor to pool risks and prevent the member from reserving fragile receivables while keeping the good ones for itself.<\/p>\n Third stage: the notification to the assigned debtor<\/strong>. The company's customer - the assigned debtor - must be aware that its debt has changed creditor, except in the confidential formula. In this case, the subrogation notice appears in full on each invoice: only payment into the factor's hands will discharge the debt. In 1996, the Court of Cassation ruled (Cass. com. 15 October 1996, no. 94-16.302) that a debtor who pays the original creditor with knowledge of the subrogation does not discharge the factoring company. Negligence on the part of an informed debtor pays off handsomely.<\/p>\n Fourth stage\u2019approval<\/strong>. The factor reserves the right to refuse to approve certain receivables deemed too risky, either because the debtor is in poor financial health, because the receivable is disputed, or because it falls outside the sector of activity covered. Approved receivables are covered by a performance guarantee; unapproved receivables are simply managed under a collection mandate, with no protection. The sorting carried out by the factor is the first line of defence against its own risk.<\/p>\n Fifth stage advance financing<\/strong>. For approved receivables, the factor immediately pays the member an advance - usually between 80 % and 90 % of the amount excluding taxes - with the balance held in the retention account. The entry is made in a current account, which records all reciprocal remittances over time. This current account mechanism is an essential accounting tool: it merges the reciprocal receivables and payables into a single balance, which protects the factor thanks to the compensatory mechanism validated by the Cour de cassation in two rulings dated 1 March 2005 and 19 April 2005.<\/p>\n Sixth stage cover<\/strong>. On the due date, the factor collects payment directly from the debtor. If it receives nothing, it initiates a reminder, followed by pre-litigation measures and, if necessary, enforcement proceedings. For approved receivables, the performance guarantee applies: the factor bears the cost of non-payment and has no recourse against the member. For other receivables, the factor has recourse against the member, who must assume the risk of non-payment.<\/p>\n French law has never created a specific transfer mechanism for factoring. Operators therefore use two common law techniques that all legal experts should bear in mind: personal subrogation under the Civil Code and the assignment of business receivables - known as cession Dailly - under the Monetary and Financial Code. The choice between the two is not neutral; it has consequences for the opposability to third parties, the system of exceptions and the treatment in collective proceedings.<\/p>\n The subrogation granted by the creditor is governed by the articles 1346 and 1346-1 of the Civil Code<\/strong>, The mechanism is simple: the factor pays the member and, by virtue of the payment, acquires the rights of the original creditor against the debtor. The mechanism is simple: the factor pays the member and, by virtue of the payment, acquires the rights of the original creditor against the debtor. This transfer requires a subrogated release concomitant<\/em> payment - this is a sensitive technical point: a postdated or backdated receipt can open the door to disputes. The subrogated factor receives the rights exactly as they existed in the member's estate - no more, no less. The rule nemo plus juris ad alium transferre potest quam ipse habet<\/em> controls the entire system.<\/p>\n The direct consequence is full effectiveness of exceptions<\/strong>. Anything that the debtor could assert against its original supplier, it can assert against the factor: contractual non-performance, lack of conformity, exception of non-performance, set-off for related debts. The Court of Cassation accepts this without reservation. This is the traditional weakness of subrogation as a support for factoring: the factor bears the hidden defects in the commercial contract between the member and its customer.<\/p>\n The assignment of business receivables was created by the Dailly Act of 2 January 1981, which is now codified in French law. articles L. 313-23 to L. 313-35 of the Monetary and Financial Code<\/strong>. It allows a credit institution - or, more broadly, an authorised financial institution - to receive an assignment or pledge of business receivables simply by handing over a slip. The slip is a written document that must comply with strict formalities: compulsory particulars, date certain, signature and sufficient description of the assigned receivables.<\/p>\n This mechanism has several specific advantages. Firstly, the\u2019opposability to third parties<\/strong> This is a decisive point in the event of competition with other seizing or assignee creditors. Secondly, the Dailly Act authorises the global assignment of existing or future receivables, provided that they can be determined. This openness to future receivables is essential for a factor who finances in advance commercial transactions that have not yet been carried out. Finally, the written form of the docket provides greater traceability in the event of a dispute over proof of transfer.<\/p>\n In practice, most factoring framework agreements provide for a combination: transfer by subrogation over time, backed by Dailly slips serving as proof and additional security. This combination is a contractual engineering choice that only makes sense if the framework agreement is read carefully - a point on which the assistance of a consultant specialising in banking law can be of real service.<\/p>\n Every factoring relationship is based on a framework contract that sets out the rights, obligations and guarantees of the parties. This document is the lifeblood of the operation: its clauses determine the economic and legal balance of the whole. Reading it quickly or relying on the factor's sales leaflet means accepting in advance conditions that you have not understood.<\/p>\n The factoring agreement is formed by the joint signature of the member and the factor. It is almost always accompanied by a technical manual and appendices (general terms and conditions, fee schedule, discount forms). These documents form an indivisible contractual whole: each element is binding on the parties for the entire duration of the relationship, and any subsequent amendment requires a written amendment. Because the contract is a commercial one, it is subject to the rule of freedom of proof by the contracting party.\u2019Article L. 110-3 of the French Commercial Code<\/strong> - which is a strength in the event of a dispute, but also a risk for the party that has not kept its exchanges.<\/p>\n The agreement may be concluded for a fixed or indefinite period. In the latter case, the factor wishing to terminate the agreement must give at least sixty days' notice, in accordance with article D. 313-14-1 of the French Monetary and Financial Code. This notice requirement is a matter of public policy, and a manager who is surprised by a sudden termination may bring a liability action against the factor.<\/p>\n The member undertakes to assign all of its receivables (globality clause), to provide complete and accurate information about its customers and its own financial situation, to notify debtors of the transfer by including the subrogation notice on each invoice, and to guarantee the actual existence of the assigned receivables. Case law severely punishes the assignment of fictitious or disputed receivables: the factor then has contractual recourse against the member, who can demand repayment of the corresponding advances and charge a penalty. More generally, the member is liable if the assigned receivable does not comply with what it has declared - non-existence, pre-existing dispute, possible set-off, statute of limitations.<\/p>\n On the factor's side, the main obligations are payment of approved receivables (immediately or on the due date, depending on the formula), a performance guarantee of up to 100 % for approved receivables, management of customer accounts and collection. The distinctive feature of factoring, which radically separates it from discounting, is that there is no recourse against the member in the event of default by the debtor, for approved receivables only. The factor protects himself upstream by his power of selection - he chooses the receivables he agrees to guarantee.<\/p>\n The factor's remuneration breaks down into two items. The factoring commission<\/strong>, This fee, which is generally between 0.5 % and 2.5 % of the invoice amount, is used to pay for management services, collection and guarantees. The financing commission<\/strong>, In principle, this remuneration is not subject to usury restrictions, since factoring is a credit between professionals. In principle, this remuneration is not subject to usury restrictions, since factoring is a loan between professionals - unless the factor grants a genuine overdraft, in which case the rules on usury apply.<\/p>\n The current account<\/strong> is at the heart of the relationship. An account is opened between the parties to record their reciprocal remittances: assigned receivables, advances, collections, commissions and fees. Entry into the account is equivalent to payment, and the balance is settled at the close by the difference between the debit and credit columns. On 1 March 2005, the French Supreme Court (Cour de Cassation) upheld clauses allowing the factor to debit the current account for debts owed to it by its customer, including related prior receivables. This is a powerful guarantee tool that enables the factor to be paid by set-off before the insolvency proceedings crystallise the rights of creditors.<\/p>\n The factor also requires a retention money<\/strong> a percentage (typically 10 % to 20 %) of the amount of the assigned receivables is blocked in a separate account. This reserve constitutes a cash pledge; it remains the legal property of the member but remains unavailable throughout the term of the contract. It is returned at the end of the contract, after the accounts have been cleared. More traditional guarantees - mortgage, pledge, directors' guarantee - may be added, particularly for sensitive cases.<\/p>\n In the latest major ruling on factoring, the Cour de cassation (French Supreme Court) has ruled that where receivables transferred by subrogation have become definitively irrecoverable, the factor is not entitled to claim, unless otherwise stipulated in the factoring contract<\/em>, The factor is then entitled to claim reimbursement of the value added tax from the subrogating creditor. The rule is suppletive of will: anything not expressly stipulated remains the responsibility of the factor. Once again, the wording of the framework agreement is decisive.<\/p>\n<\/p><\/div>\n Banking practice has developed several formulas that redistribute risks, services and costs in different ways. They all bear the generic name of factoring, but their legal content differs significantly.<\/p>\n Le full factoring<\/strong>, or traditional factoring, is the most widespread formula. It combines the three basic services: advance financing, receivables management and performance guarantee. It's the complete solution for companies that want to optimise their cash flow and outsource the dunning process. The cost is the highest, but the coverage is total.<\/p>\n L'maturity factoring<\/strong> (maturity factoring<\/em>) eliminates the need for advance financing: the member waits until the normal due date to be paid, but benefits from the management and guarantee against insolvency. The company buys collection insurance and does not need to make a cash advance. This formula is suitable for companies whose main need is protection against non-payment, not immediate cash.<\/p>\n L'non-recourse factoring<\/strong> - and its opposite, recourse factoring (with recourse<\/em>) - transfers the risk of insolvency. In the non-recourse version, the factor bears the full risk of the debtor's default. In the recourse version, the factor retains the right to take action against the member if the customer fails to pay. The cost of the recourse version is significantly lower - the factor does not bear the risk - but the member is not protected. In economic terms, this formula is similar to a credit backed by receivables.<\/p>\n L'confidential factoring<\/strong> (undisclosed factoring<\/em>) preserves the business relationship by not notifying the debtor of the assignment. The member continues to issue and collect invoices ostensibly on its own behalf, but then pays the sums to the factor. This formula has two attractions: it avoids the negative signal sometimes perceived by customers (\u00abWhy is my supplier going through a factor?\u00bb) and it preserves direct commercial exchanges. But it weakens the legal security of the transfer - in the absence of notification, a debtor who pays the initial creditor in good faith is validly discharged, and the traceability of flows becomes a critical issue.<\/p>\n L'reverse factoring<\/strong> (reverse factoring<\/em> or supply chain finance<\/em>) reverses the logic: the initiative comes from the ordering debtor - generally a large company - which sets up a system enabling its suppliers to be paid in cash by a factor, in return for a commission. The major account preserves its negotiated payment terms, its suppliers improve their cash flow, and the factor finances the chain. Legally, the operation combines mandate and assignment, and raises specific questions in the event of the ordering party's insolvency - in particular as regards possible reclassification as bank debts, which would be subject to the treatment of insolvency proceedings. The volume of searches for \u00abreverse factoring\u00bb has doubled in the space of a year, a sign of the growing popularity of the concept.<\/p>\n The question of cost is the most frequently asked by managers comparing offers. The answer is never unequivocal, because it depends on the volume entrusted, the number of debtors, the risk profile of the customer, the business sector and the formula chosen. Nevertheless, four components can be identified, which are found in all contracts and which add up to the real cost of the operation.<\/p>\n La factoring commission<\/strong> - or management commission - remunerates the collection service, the maintenance of customer accounts and the performance guarantee. It is expressed as a percentage of the total amount of invoices assigned and varies, in current offers, between 0.5 % and 2.5 %. Companies that assign a large number of low-value invoices to a large number of debtors pay the highest commission, because the administrative management is more cumbersome. Companies that concentrate their flows on a few large accounts with good ratings obtain more favourable terms.<\/p>\n La financing commission<\/strong> pays for the cash advance. It takes the form of interest calculated over the actual time the debt is carried, at the bank's base rate - often indexed to \u20acSTR or 3-month Euribor - plus a margin of around two points. A 60-day receivable carried by the factor therefore costs, in terms of financing commission alone, the annual rate multiplied by 60\/365, i.e. a fraction of the nominal rate. The longer the payment terms, the more this line costs.<\/p>\n The ancillary costs<\/strong> are a grey area to keep an eye on. Application fees on opening, account maintenance fees, monthly subscription fees, fees for dunning unpaid debts, litigation fees, fees for returning unapproved debts: these ancillary items can account for a significant percentage of the total cost, especially for VSEs and SMEs that don't negotiate much. A serious comparison should always look at the \u00aball-in\u00bb cost, not just the commission shown.<\/p>\n La retention money<\/strong>, Lastly, it is not strictly speaking a cost - it remains the property of the member - but it has a direct cash effect: it permanently mobilises 10 % to 20 % of the amount of the assigned receivables, a sum which is only returned at the end of the contract. For a company that entrusts a permanent outstanding amount to a factor, this asset weighs on working capital and must be included in the economic analysis.<\/p>\n On the basis of these components, the effective cost is generally between 1.5 % and 4 % of entrusted sales, depending on the formula, the volume and the quality of the receivables. Factoring is rarely the cheapest solution - a traditional bank discount or a dry Dailly assignment often costs less. But it does provide services that other short-term financing techniques do not: guarantees, management, and the assumption of foreign exchange risk for the international version.<\/p>\n Presented as a miracle solution by factor salespeople, factoring is neither good nor bad in absolute terms: it is a tool whose relevance depends on the company's specific situation. You have to weigh up the two sides.<\/p>\n The benefits<\/strong> are real. The first is immediate cash savings: early payment brings payment closer, improves working capital and means that new orders can be financed without waiting for the sometimes long payment terms imposed by major clients. The second is protection against non-payment: for approved receivables, the performance guarantee transfers the risk of insolvency from the debtor to the factor. The third is the outsourcing of administrative management: reminders, monitoring of collections, litigation - time-consuming tasks that fall outside the company's remit. The fourth is information: a good factor constantly assesses the financial health of its member's debtors and alerts them to any deterioration. This credit information, incidental but valuable, avoids unpleasant surprises.<\/p>\n The disadvantages<\/strong> There are also a number of disadvantages, which need to be mentioned. The first is the cost, which is higher than a traditional bank loan for the same amount. The second is the visibility of the operation for customers: notification of subrogation may be perceived, rightly or wrongly, as a sign of commercial fragility - unless the confidential formula is chosen, which is more costly and legally more fragile. The third is the globality clause: the member loses control of the collection relationship, and some customers do not appreciate dealing with a factor whose methods are more direct than those of an established supplier. The fourth is the factor's power of selection: not all receivables are covered, and those that are rejected remain the responsibility of the member, often the riskiest - a well-known perverse effect: the factor takes the good receivables and leaves the bad ones. The fifth is contractual dependence: a poorly drafted contract creates lock-in effects (minimum duration, long notice period, exit penalties) that make it costly to exit if the relationship deteriorates.<\/p>\n Factoring is not reserved for large companies - in fact, the opposite is true in French practice. The VSEs and SMEs<\/strong> are the core target of factors, because they combine two characteristics: a rapid need for cash linked to the difficulty of obtaining a sufficient bank overdraft, and payment deadlines imposed by their key account customers that can reach sixty or ninety days despite the LME law. A company that invoices \u20ac2 million a year to solid customers, with an average collection period of 60 days, has almost \u20ac330,000 in trade receivables at any one time - a sum that a factoring contract makes largely available in cash.<\/p>\n The ETIs and large companies<\/strong> also use factoring, but with a different rationale: rather than optimising their cash flow, they deconsolidate their trade receivables to improve their financial ratios (off-balance sheet factoring<\/em>). These transactions, which are legally more complex, require a sale without recourse and an effective transfer of risks and rewards, in accordance with IFRS accounting standards. It is a financial management tool rather than a financing tool.<\/p>\n Some sectors<\/strong> lend themselves better than others to factoring. B2B activities with recurrent invoicing and identified, solvent debtors are ideal: industry, trade, transport, intellectual services to businesses. Conversely, businesses that mix B2B and B2C, those that operate on the basis of fluctuating orders or with a lot of commercial disputes, are less suitable - disputed receivables are rejected by the factor, and the company ends up paying for a service that covers only part of its turnover.<\/p>\n Three situations in particular warrant serious consideration of factoring. Firstly, a rapid growth phase<\/strong> during which working capital requirements increase faster than traditional debt capacity. Then, a strong exposure to one or two major clients<\/strong> whose failure would jeopardise the business: the performance bond then plays its full insurance role. Finally, a international development<\/strong> Export-import factoring is a way of financing and securing foreign sales without having to deal with a large number of local banks.<\/p>\n Factoring is a contract that crosses several branches of law and, as such, accumulates risks specific to each of them. Three major legal risks recur in all disputes.<\/p>\n The assigned debtor may raise against the factor all the defences that it could have raised against the original supplier: non-performance of the commercial contract, lack of conformity of the goods, incomplete performance, plea of non-performance, set-off for related debts. The principle is inflexible: the assignee cannot have more rights than the assignor. If the goods delivered are defective, if the service has not been rendered, if a set-off can be invoked, the customer may refuse to pay the factor. The factor acquires the claim with its qualities but also its defects, and case law has never sought to mitigate this rigour.<\/p>\n The risk is amplified when the debtor invokes the set-off for related debts<\/strong>. If the factor's claim against the supplier arises from the same contractual relationship as the assigned debt, the factor may set off the claim against the factor, provided that the factor's right to set off a debt arose prior to notification of the assignment. In commercial matters, case law widely accepts the concept of relatedness, which leaves the factor with a permanent window of vulnerability.<\/p>\n The factor may compete with other holders of rights in the same claim: a previous Dailly assignee, a distraining creditor, a beneficiary of a retention-of-title clause or a subcontractor. The rules of priority depend on the method of transfer used - subrogation or Dailly - and the date on which each right became enforceable against third parties.<\/p>\n The most emblematic case is the conflict with the subcontractors<\/strong>. Law no. 75-1334 of 31 December 1975 limits the assignment of a contractor's receivables to work that he personally carries out. The consequence is clear: a factor who has acquired a contract receivable that includes subcontracted work has not acquired the share corresponding to that work, which remains with the subcontractor. In the event of a dispute, the subcontractor prevails over the factor, regardless of the date of assignment. This is a recurring conflict in the construction and public works sector, and should be anticipated as soon as the framework contract is signed.<\/p>\n Another classic conflict is that with retention of title clause<\/strong>. In a 2000 ruling (Cass. com. 26 April 2000, no. 97-21.486), the Court of Cassation ruled that the factor's subrogated payment does not defeat the retention of title clause stipulated in favour of the original seller. If the seller reclaims his goods before full payment has been made, the factor, subrogated to the buyer's rights, cannot object.<\/p>\n Members who assign fictitious or disputed receivables expose their own contractual liability. The factor has a contractual right of recourse against the member and may demand repayment of the advances made, plus penalties. These disputes are frequent and sometimes lead to actions for fraud if there is evidence of intent to deceive. For a detailed analysis of these mechanisms, see the satellite article on exceptions applicable to factoring<\/a> and the one dedicated to disputes between the factor and third parties<\/a>.<\/p>\n The opening of a collective procedure - safeguard, recovery, judicial liquidation - upsets the balance of a factoring contract. Whether the procedure affects the member or the assigned debtor, the consequences are different and the pitfalls numerous. This is where the technicalities of banking law meet those of insolvency law. Our guide to insolvency proceedings<\/a> gives an overall view of the subject.<\/p>\n When it is the transferring company that is the subject of the procedure, the central issue is the fate of transferred receivables<\/strong>. Jurisprudence firmly protects the factor's ownership: receivables duly assigned before the court ruling on the opening of insolvency proceedings escape the creditors as a group - they do not form part of the assets of the debtor undergoing insolvency proceedings, and the factor retains ownership of them. In 2004, the Court of Cassation confirmed that this principle applies even to claims arising from contracts in progress at the time of the opening of insolvency proceedings: the earlier assignment produces its effects even if the claim is not due until later. Strong protection, essential for the security of the transaction.<\/p>\n La suspect period<\/strong> - between the date of cessation of payments and the judgment opening the business - is a high-risk area. Article L. 632-1 of the French Commercial Code provides for the automatic nullity of certain acts. However, in its ruling of 17 June 1980, the Court of Cassation ruled that transfers of receivables from the member to the factor were not payments made by the member but payments received by it - article L. 632-1 therefore does not apply to them. However, this does not mean that there is no risk: Article L. 632-2 allows for optional cancellation if the factor was aware of the suspension of payments at the time of the transfer. Jurisprudence tempers this threat by admitting that the remittances are merely the performance of a framework contract predating the suspect period - but vigilance is still required.<\/p>\n La continuation of the contract<\/strong> The Court of Cassation, in a decision of 8 December 1987, ruled that the intuitu personae nature of the agreement does not prevent the court-appointed administrator from exercising the option provided for in article L. 622-13 of the Commercial Code. If the contract is continued, the factor is entitled to the privilege of subsequent creditors useful to the continuation of the business (art. L. 622-17).<\/p>\n It is imperative that the factor declare your claims<\/strong> against the member within two months of publication of the judgment in the BODACC. This applies to commissions and agios owed prior to the commencement of proceedings, claims arising from an action against the member for fictitious claims, and unpaid advances on unapproved claims. Failure to make a declaration means that the claim cannot be set off against the proceedings - a radical sanction that prevents any subsequent set-off.<\/p>\n When the company's customer is the subject of proceedings, the factor must declare the claims it has acquired from the member - and only the factor is entitled to do so, since the claim has left the member's assets. The exception concerns unapproved receivables that have only been the subject of a simple collection mandate: in this case, the member remains the creditor and must make the declaration himself. The debtor in insolvency proceedings retains the right to raise all defences inherent in the claim: nullity or rescission of the contract, defence of non-performance, set-off for related debts. In the event of liquidation by the court, the factor is subject to a ban on individual proceedings and can only take action for payment by means of a declaration and verification of claims.<\/p>\n International factoring meets the needs of exporters faced with foreign debtors in countries where collection is uncertain and where the risk of non-payment is exacerbated by legal, linguistic and cultural distance. The regulatory framework is based on two international conventions and, for the rest, on national laws.<\/p>\n Adopted on 28 May 1988 under the aegis of Unidroit and entered into force on 1 May 1995, the Ottawa Convention is the founding text of uniform international factoring law. France was one of the first countries to ratify it. For a contract to fall within its scope, two criteria must be met: a material criterion (the supplier assigns receivables arising from contracts of sale or provision of services to a factor who takes on at least two of the four functions - financing, account keeping, collection, protection against default) and an internationality criterion (the supplier and the debtor must have their places of business in different States, and either these States are contracting States or the contract is governed by the law of a contracting State).<\/p>\n The Convention applies in a suppletive capacity (article 3): the parties may exclude it, but the exclusion must be total - no article-by-article breakdown. Three contributions deserve attention. First, it expressly validates the assignment of future claims and global assignments, on the sole condition that the claims are \u00abdeterminable\u00bb at the time they arise - a more flexible approach than the contractual subrogation of French law, which traditionally requires that the claim has already arisen. Secondly, Article 6 rules out contractual non-transferability clauses: assignment to the factor is valid even if the commercial contract prohibits it. However, France has entered a reservation on this point: for debtors established in France, the clause may retain its effect. Lastly, the notification regime has been clarified: as long as the debtor has not received written notification, he is validly discharged by paying his initial supplier; after notification, only payment to the factor is discharging.<\/p>\n The Convention has known limitations. It does not regulate the enforceability of the assignment against third parties, nor the consequences of the opening of collective proceedings - two major shortcomings that refer back to national law and reintroduce the complexity that the text sought to reduce.<\/p>\n International factoring is generally based on collaboration between an export factor (located in the supplier's country) and an import factor (established in the debtor's country). This organisation, the interfactors chain<\/strong>, The import factor assesses the creditworthiness of local buyers, manages debt collection in its own jurisdiction and assumes the credit risk. The main networks of factors are grouped together within Factors Chain International (FCI), a structure that provides a standardised contractual framework and a secure messaging system between its members.<\/p>\n Several variants exist. The two-factors system<\/em>, described above, is the classic scheme. The direct export factoring<\/em> simplifies the structure: the factor in the exporting country manages the entire operation alone, without a local intermediary - at the cost of less knowledge of the debtor market. L\u2019import factoring<\/em> reverses the scheme: the factor in the importing country handles the transaction alone. Finally, confidential international factoring preserves the business relationship by not notifying the debtor of the assignment.<\/p>\n The cost is higher than in domestic factoring - with commissions of between 0.5 % and 3 % - because of the two factors, longer processing times due to inter-factor communication, and contractual documentation that has to incorporate several legal systems. Currency risk is an additional variable, often covered by a separate financial instrument. In the absence of an applicable international convention, the law applicable to the contract is determined by Regulation (EC) No. 593\/2008, known as Rome I: the parties may choose the law, failing which the connecting rules apply. The UNCITRAL Convention of 12 December 2001 on the international assignment of receivables completes the framework by validating global assignments of future receivables and the automatic transfer of securities, but its ratification remains limited.<\/p>\n Factoring is a technical contract that crosses several branches of law, and the points on which a lawyer can provide concrete value are clear. Four typical situations merit intervention.<\/p>\n The first is the negotiation of a framework contract<\/strong>. Factors' commercial offers are based on general terms and conditions, each clause of which needs to be re-read: power to select receivables, recourse clauses, holdback, term and notice period, exit penalties, globality clauses, operation of the current account. An upstream lawyer can negotiate unbalanced points and anticipate exit scenarios. On a factoring contract designed to last several years, the gain always exceeds the cost of the advice.<\/p>\n The second is the managing a dispute over the enforceability of exceptions<\/strong>. When an assigned debtor refuses to pay on the grounds of non-performance or invokes a set-off, the legal issue can become highly technical - analysis of the underlying commercial contracts, chronology of the facts, connectedness, date on which the claims arose. The defence lies at the intersection of the civil law of obligations and commercial law.<\/p>\n The third is the\u2019links with collective proceedings<\/strong>, Whether the proceedings affect the member or the assigned debtor. The stakes are high: ownership of assigned receivables, timely declaration, reclamation, current account set-off, treatment of prior and subsequent receivables. A procedural error in a declaration can destroy the position of the factor or the member. Conversely, a good grasp of the mechanisms can preserve rights that ordinary creditors lose.<\/p>\n The fourth is the disputes relating to the current account and the holdback<\/strong>, This is particularly true at the end of a contract. Disputes relate to the rendering of accounts, the calculation of the balance, the charging of costs, the return of the deduction and exit penalties. These technical disputes are based on a precise reading of the framework contract and the pricing annexes.<\/p>\n Solent Avocats is involved at every stage, working alongside member companies, factoring companies and assigned debtors involved in a factoring relationship. For an in-depth analysis of your situation, please contact our team. To place this matter in the broader context of banking law, consult our complete guide to banking law<\/a>, and for our operational interventions, our page dedicated to the banking and finance law<\/a>.<\/p>\n Factoring is a financing technique whereby a company transfers its trade receivables to a financial institution - the factor - which makes an advance payment, collects the invoices from the debtors and guarantees payment in the event of insolvency. Three services in a single contract: short-term financing, receivables management and cover for the risk of non-payment. The contract is based on a framework agreement signed between the member (the company) and the factor.<\/p>\n<\/details>\n The member signs a framework agreement with the factor and then, each time it issues an invoice, assigns it to the factor (by subrogation or by Dailly slip) and notifies the assigned debtor. The factor approves or rejects the receivable, pays a cash advance (80 to 90 % of the amount excluding tax) and then handles collection on the due date. The balance, less a holdback (10 to 20 %), is returned when the customer pays. Transactions are recorded in a current account, which records reciprocal discounts as they occur.<\/p>\n<\/details>\n Factoring guarantees payment of receivables without recourse against the member in the event of non-payment by the debtor, for approved receivables. Discounting, on the other hand, retains a right of recourse against the remitter: if the debtor fails to pay, the bank turns to its customer. Factoring also includes management services (account management, collection) that discounting does not. Discounting is based on a commercial paper (bill of exchange, promissory note), whereas factoring operates by direct transfer of the commercial debt.<\/p>\n<\/details>\n Personal subrogation (articles 1346 et seq. of the French Civil Code) and the assignment of trade receivables under the Dailly Act (articles L. 313-23 et seq. of the French Monetary and Financial Code). Subrogation requires prior payment by the factor and transfers the rights of the original creditor to the factor by means of a concomitant subrogation discharge. The cession Dailly allows a global transfer by slip, including future receivables, with opposability to third parties from the date indicated on the slip. Most agreements combine the two techniques.<\/p>\n<\/details>\n Two main components. The factoring commission represents 0.5 % to 2.5 % of the amount of invoices assigned; it remunerates the management, collection and guarantee. The financing commission corresponds to interest of around two points above the bank base rate, calculated over the term of the debt. With the addition of ancillary costs (file, dunning, litigation), the all-inclusive total cost is generally between 1.5 % and 4 % of entrusted sales, depending on the volume, the debtor profile and the formula used. This remuneration is not subject to the usury rate, since it concerns credit between professionals.<\/p>\n<\/details>\n Advantages: immediate cash savings, transfer of the risk of non-payment for approved receivables, outsourcing of receivables management, permanent information on the financial health of debtors. Disadvantages: higher cost than a discount or traditional bank loan, visibility of the operation to customers (except for confidential formulas), loss of control over the collection relationship, factor's power of selection leaving the member with the riskiest receivables, contractual dependence linked to the globality clause and the minimum term.<\/p>\n<\/details>\n Factoring is aimed at all B2B companies that invoice identified, creditworthy business customers, from very small businesses to large corporations. The core French target group is made up of SMEs faced with long payment terms and a rapid need for cash. Small, medium-sized and large companies also use them to deconsolidate their trade receivables. Three situations in particular warrant consideration of this solution: a phase of rapid growth, heavy exposure to a few major principals, or international expansion that justifies export-import factoring.<\/p>\n<\/details>\n Yes, the debtor can raise the defence of non-performance of the commercial contract against the factor: the assignee cannot have more rights than the assignor. The factor acquires the receivable with its qualities but also its defects. The debtor may also invoke set-off for related debts, provided that his right to set-off arose before notification of the assignment. This rule, which is very unfavourable to the factor, partly explains the factor's upstream power of selection over the receivables it agrees to approve.<\/p>\n<\/details>\n Receivables duly transferred before the commencement of the proceedings are not shared with the creditors - the factor retains ownership of them, even if they are not due until after the proceedings have been commenced (Cass. com. 7 December 2004). However, the factor must declare its own receivables (commissions, agios, advances on unapproved receivables) within the statutory period of two months from publication of the judgment in the BODACC. The factoring contract may be continued by the receiver despite its intuitu personae nature (Cass. com. 8 December 1987). Transfers made during the suspect period are not payments made by the member and are not automatically null and void under article L. 632-1 of the French Commercial Code.<\/p>\n<\/details>\n Yes, international factoring is governed by the Ottawa Convention of 28 May 1988 (Unidroit) and generally involves two factors - an export factor in the supplier's country and an import factor in the debtor's country - working together in an interfactor chain organised by Factors Chain International (FCI). The UNCITRAL Convention of 12 December 2001 on the assignment of international receivables completes the system. The cost is higher than for domestic factoring (0.5 % to 3 %) because of the two-factor structure and the additional risks (foreign exchange, foreign insolvency, recognition of rulings).<\/p>\n<\/details><\/div>\n<\/section>","protected":false},"excerpt":{"rendered":" L’affacturage permet \u00e0 une entreprise de c\u00e9der ses cr\u00e9ances commerciales \u00e0 un \u00e9tablissement financier \u2014 l’affactureur \u2014 qui en assure le recouvrement, garantit le paiement et verse un financement anticip\u00e9. La solution s\u00e9duit parce qu’elle r\u00e9pond \u00e0 trois besoins en un seul contrat : tr\u00e9sorerie imm\u00e9diate, protection contre les impay\u00e9s, externalisation de la gestion du poste clients. Mais sa mise en \u0153uvre soul\u00e8ve des questions juridiques r\u00e9elles, de la r\u00e9daction de la convention-cadre jusqu’aux situations de crise \u2014 proc\u00e9dures collectives, litiges internationaux, conflits avec les tiers. Ce guide explique comment fonctionne l’op\u00e9ration, ce qu’elle co\u00fbte, \u00e0 quelles entreprises elle s’adresse, et surtout quels sont les pi\u00e8ges juridiques que seul un \u0153il averti d\u00e9tecte avant la signature.<\/p>","protected":false},"author":0,"featured_media":0,"parent":18287,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"page-templates\/template-guide-enfant.php","meta":{"footnotes":""},"solent_domaine":[426,410],"class_list":["post-18334","page","type-page","status-publish","hentry"],"_links":{"self":[{"href":"https:\/\/solent-avocats.com\/en\/wp-json\/wp\/v2\/pages\/18334","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/solent-avocats.com\/en\/wp-json\/wp\/v2\/pages"}],"about":[{"href":"https:\/\/solent-avocats.com\/en\/wp-json\/wp\/v2\/types\/page"}],"replies":[{"embeddable":true,"href":"https:\/\/solent-avocats.com\/en\/wp-json\/wp\/v2\/comments?post=18334"}],"version-history":[{"count":1,"href":"https:\/\/solent-avocats.com\/en\/wp-json\/wp\/v2\/pages\/18334\/revisions"}],"predecessor-version":[{"id":18335,"href":"https:\/\/solent-avocats.com\/en\/wp-json\/wp\/v2\/pages\/18334\/revisions\/18335"}],"up":[{"embeddable":true,"href":"https:\/\/solent-avocats.com\/en\/wp-json\/wp\/v2\/pages\/18287"}],"wp:attachment":[{"href":"https:\/\/solent-avocats.com\/en\/wp-json\/wp\/v2\/media?parent=18334"}],"wp:term":[{"taxonomy":"solent_domaine","embeddable":true,"href":"https:\/\/solent-avocats.com\/en\/wp-json\/wp\/v2\/solent_domaine?post=18334"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}How does factoring work?<\/h2>\n
Personal subrogation or cession Dailly: a choice of two legal techniques<\/h2>\n
Personal subrogation, the traditional support<\/h3>\n
Dailly assignment, a more formalised alternative<\/h3>\n
The factoring framework agreement<\/h2>\n
Formation and legal nature of the contract<\/h3>\n
Obligations of the member<\/h3>\n
Factor's obligations<\/h3>\n
Remuneration, current account and holdback<\/h3>\n
Factoring formulas: four variants to be aware of<\/h2>\n
How much does factoring cost?<\/h2>\n
Advantages and disadvantages of factoring<\/h2>\n
For which companies?<\/h2>\n
The legal risks of factoring<\/h2>\n
Enforceability of defences<\/h3>\n
Conflicts with third-party creditors<\/h3>\n
False claims and the factor's recourse<\/h3>\n
Factoring and insolvency proceedings<\/h2>\n
Collective proceedings against the member<\/h3>\n
Collective proceedings of the assigned debtor<\/h3>\n
International factoring<\/h2>\n
The 1988 Ottawa Convention<\/h3>\n
The interfactor chain system<\/h3>\n
When to call a lawyer<\/h2>\n
Sources<\/summary>\n
Legislation and agreements<\/h3>\n
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Case law<\/h3>\n
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Doctrine<\/h3>\n
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Frequently asked questions about factoring<\/h2>\n
What is factoring? A simple definition<\/summary>\n
How does factoring work in practice?<\/summary>\n
What is the difference between factoring and discounting?<\/summary>\n
What are the two legal mechanisms used in factoring?<\/summary>\n
How much does factoring cost?<\/summary>\n
What are the advantages and disadvantages of factoring?<\/summary>\n
Who can use factoring? For which companies?<\/summary>\n
Can a customer refuse to pay the factor if the goods are defective?<\/summary>\n
What happens if the member goes into receivership?<\/summary>\n
Is factoring possible for international receivables?<\/summary>\n