Economics and Finance Education
June 6, 2025
2 mins

What is factoring?

You've heard the word, but...

Sabrina Chikh

You’ve heard the word – but do you really know what it means? Sabrina Chikh, Associate Professor of Finance at SKEMA Business School, as she pulls back the curtain on factoring.

The video features French audio, English subtitles are available

Granting payment terms to customers is a vital service for turnover growth. Customer credit is a sensitive item that directly impacts companies’ working capital requirements, and is a key issue in cash flow management.

To address this, companies can turn to factoring companies, or “factors”. These short-term financing players are mainly specialised subsidiaries of major banks. With an annual volume of transferred invoices worth €420 billion, this market places France in pole position in Europe, and in second place worldwide after China. In France, there are 20-odd players in this sector, with a high concentration around five banks holding 75% of the market share.

Factoring: a means of financing

Companies facing immediate liquidity needs will be able to sell on 80% to 90% of their customer receivables.

The cost of factoring is calculated according to 3 components:

Factoring application fees
Factoring commission
The cost of bank financing

The total cost of factoring varies between 0.4% and 4% of the total amount incl. VAT of the customer receivable.

Once payment is received, the factor transfers the remaining balance to the company, minus commission fees.

The factoring company takes care of debt collection, issues the necessary reminders and handles collection procedures in the event of non-payment.

As we can see, factoring is a financing method that offers companies considerable flexibility and more effective management of their customer receivables, allowing them to focus on their commercial activities. It represents a large market for short-term financing providers. This market could be disrupted by the arrival of innovative players offering fully digitised services, where major progress in risk assessment is achieved through artificial intelligence tools.