Reverse factoring – or Supply Chain Finance (SCF) – is yet to gain traction in France. While the volume of factored receivables hit EUR 427 billion in 2023, reverse factoring only accounted for 3% and has stagnated in volume since 2020, according to the Association des Sociétés Financières.
This is likely to remain the case until the structural barriers to its development are addressed. Removing these obstacles would be beneficial as supply chain finance offers some significant advantages for both large companies and their suppliers.
Implementing a reverse factoring program requires significant effort from the ordering party, including extensive communication, internal training, updates to information systems, considerable support from the management team and careful selection of financial partners. That’s not to mention the considerable challenge of onboarding suppliers.
However, these operational challenges are only one part of the equation – more fundamental issues are hindering the adoption of reverse factoring. France is the second largest-market for factoring in the world after China, but factoring companies show little interest in supply chain finance.
French factoring companies reported net banking income of EUR 1.24 billion and a combined net profit of EUR 379 million in 2023. Paradoxically, it is their exceptional profitability – in excess of 30% – that is hindering the development of reverse factoring.
Factors have little incentive to promote this type of structure unless they are responding to a specific client request. Traditional factoring is a well-established business that involves limited risk and low capital requirements and is used by around 30,000 companies in France. Reverse factoring lacks these advantages, primarily due to the central role played by the ordering party.
French factoring companies have made little effort to promote reverse factoring to large corporates. Over the past decade, their investment in this product has lagged those of their British, Spanish and American counterparts, and also those of many European and US fintechs.
Optimizing working capital isn’t the right objective
In most cases, an ordering party initiating a reverse factoring program is aiming to improve their payment terms somehow. For instance, the ordering party (buyer) may negotiate longer payment terms with suppliers in exchange for access to the reverse factoring program, which offsets the delay by enabling suppliers to receive early payment.
The ordering party may also waive payment terms, but in this case, its debit is deferred – the financial institution absorbs the delay until the deferred debit occurs. This arrangement can be seen as a quid pro quo offered by the funder in exchange for its role in the program, or simply as a form of soft retrocession. While the financial objectives of improving working capital – enhancing cash flow, reducing net debt and optimizing financial leverage – are legitimate, they have also led to the abandonment of many reverse factoring programs.
Asking suppliers to extend payment terms can be difficult. It may be impractical to do so when dealing with thousands of suppliers, risky due to regulations governing payment terms, or simply met with resistance from the suppliers.
If the arrangement only involves deferring the payment to the funder, who has already paid the supplier, it may be problematic for the outstanding amount to continue being presented as supplier debt. Doing so would require proof that the substance and characteristics of the debt have remained unchanged.
Factoring’s ability to add value in a deconsolidation scheme involving receivables tends to be less evident in the case of reverse factoring involving payables. Using a program to improve the buyer’s working capital requires significant resources to secure the support of all parties, especially in a context in which the Financial Accounting Standards Board and the International Accounting Standards Board have tightened accounting regulations in this area.
This means a paradigm shift in which ordering parties are invited to abandon their exclusive focus on optimising cash flow, and that instead they adopt more responsible and sustainable ambitions.
The right objectives to pursue
By leveraging their credit profile, large companies can provide their suppliers with access to more affordable and flexible financing than what is typically available in local markets. This support strengthens the stability of the entire supply chain.
A well-designed program can be seen as a responsible approach, helping to forge closer links between the company and its suppliers. This climate of trust helps foster lasting partnerships.
By offering even more attractive terms to suppliers who commit to ESG initiatives, principals can align their programs with their commitments to corporate social responsibility and at the same time encourage their partners to adopt more responsible practices.
Approval times for supplier invoices can vary significantly depending on the business and organization in question. A reverse factoring program, which relies on payment orders, can help streamline and improve approval processes over time.
A gold mine in the accounting department
Only the accounting department of the principal knows which invoices are due for payment and when. This information is worth its weight in gold if it is shared with a financial third party responsible for paying suppliers in advance as it ensures that the payment will be made with certainty by the client.
Almost all factoring programs operate without the debtor’s prior approval of the invoice purchased, the amount it is for, its currency and its settlement date.
The principle of invoice approval is not a detail: with factoring, the factor has no certainty that the assigned invoices will be paid on the due date, whereas with reverse factoring, any advance payment to a supplier will be made in the knowledge that the buyer will pay on the due date.
Facilitators of success
A reverse factoring project involves change, so it will inevitably face obstacles. However, a few key principles can simplify its implementation.
The objective of improving working capital must be ruled out, even if factoring companies suggest otherwise. Upstream, the client must consider why it is often reluctant to participate in such programs as a supplier. Reasons might include unattractive pricing and a lack of time.
The goal must be to secure the most competitive pricing terms for suppliers. There can be a substantial difference between the terms typically offered by financial partners to suppliers and those provided under the proposed program – often several hundred basis points.
Finally, close attention must be paid to the terms of program membership and participation. In this regard, the paying agent model, which is based not on the assignment of receivables but on the transfer of cash flow rights, merits further investigation and application in areas in which it has already been successfully tested.