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Financing
Factoring: Discover advantages and disadvantages
Mathieu Galvani
January 5, 2024
5 min

Looking for a financial solution to enable your business to grow? Nowadays, getting a bank loan is difficult, response times and fund disbursement can be lengthy, and the application process can be complicated.

Good news! At Defacto, we have the alternative solution to factoring. We offer all the benefits of factoring without its disadvantages. You will find our differentiation at the end of the article.

Why read this article?

It is important for businesses to maintain good cash flow management to ensure progressive growth. At Defacto, we position ourselves as experts in short-term financing. We facilitate financial management for businesses.

Our reputation and strength are characterized by the simplification of financing processes, allowing businesses to focus on their development.

Our solutions guarantee our clients efficient and peaceful management of their receivables, which is crucial for the stability of their business.

Since our establishment, we have developed partnerships with numerous reputable companies such as Ysé, Karenae, Allocab, and Behring Water.

Their satisfaction confirms the reliability and effectiveness of our support in managing their cash flow. We are talking about over €350 million in short-term financing granted to these SMEs.

Do you want to learn more about factoring, how it works, and its benefits? You will find all the useful answers in this article.

You will also discover why Defacto is the wisest choice to help you improve your financial statements.

What is factoring ?

A growing financing method, factoring allows companies to assign their commercial receivables to a factor in exchange for an advance of funds.

It is therefore an interesting alternative to traditional financing, providing reassurance to businesses and giving them the opportunity to consolidate their cash flow and better focus on their goals.

More fluid and faster than a bank loan, factoring does not affect the company's debt ratio, as it immediately converts existing assets into cash.

The contract formation is also simpler than that offered by banks. Banks can sometimes oppose a financing request, especially when the company is new or in a difficult financial situation.

The factor, on the other hand, bases its decision to accept or refuse a contract on the solvency of the clients. In other words, unlike a bank loan, a factoring contract can be granted even in case of cash flow difficulties.

How does factoring work?

While factoring may seem simple, it remains a complex method, and understanding how it works is essential in order to benefit from all its advantages. This complex procedure allows companies to quickly access funds.

The role of the factoring company

The factoring company - the factor - plays the role of a financial intermediary. It ensures meticulous management of receivables by taking care of invoice collection.

The factoring process

The factoring process can be summarized in five steps:

  • Invoicing: The company issues invoices to its clients.
  • Assignment of receivables: The company submits its invoices to the factor.
  • Cash advance: The factor provides an advance of funds to the company, often ranging from 80% to 90% of the total invoice amount.
  • Collection: The factor handles the collection of the invoice from the client.
  • Final settlement: Once the invoice is paid, the factor pays the remaining balance to the company, after deducting the fees associated with the factoring process.

Associated fees

Factoring involves fees that can vary depending on the quality of the receivables and the financial institution involved. Generally, these fees can be divided into three parts:

  • Factoring commission, which ranges from 0.5% to 5% of the total invoice amount, to remunerate the factor.
  • Financing commission, similar to the interest rates practiced by banks, to remunerate the cash advance provided by the factor. Its amount varies depending on several factors, and it is advisable to contact factoring companies for a more accurate view.
  • Administrative fees, which include dispute management fees or internet service connection costs.

To maximize the benefits of this financial solution, determining factors such as the choice of the factoring company and associated fees must be carefully studied.

Benefits and disadvantages of factoring

Here is a summary of the benefits and disadvantages of factoring:

Benefits Disadvantages

Increased cash flow: 

Factoring, by advancing a portion of the amount of customer invoices, allows you to quickly receive cash, thereby improving your cash flow for financing your current needs

Customer data control: 

Factoring can be seen as an intrusion, as the factor has direct access to your customer data.

Simplification of account receivables management: 

Factoring, by advancing a portion of the amount of customer invoices, allows you to quickly receive cash, thereby improving your cash flow for financing your current needs

High cost of factoring: 

The factor charges additional fees and commissions that can increase the cost of factoring.

Lack of flexibility: 

Factoring often requires a commitment of at least one year and a mandatory minimum amount to be financed

Why choose Defacto for your financing?

Defacto offers an efficient and simplified financing solution accessible to all businesses. Compared to traditional factoring, our method offers several advantages and eliminates certain disadvantages:

  • We do not interfere in your customer and supplier relationships.
  • You retain control over your cash receipts.
  • We offer a 100% online service.
  • We connect directly to your bank as well as your invoicing and accounting tools to avoid any paperwork and analyze your financing capacity accurately.
  • We have designed a quick eligibility test for an immediate response.
  • Our financing process is smooth and pleasant.
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