Funding your company in France
When running your company, the most important thing to fund is your WCR (Working Capital Requirement). Basically, this refers to all the expenses you absolutely need to pay to get your activity going (you can’t sell products if you can’t buy the materials to make them, for example).
Generally, it’s best to fund this with the revenue that you generate with your activity. But what if you’re unable to do it? Thankfully, there’s still a solution available to you: factoring.
In 2015, Factoring operations represented 250 billion euros, and they have only been growing since. What is it, and why are so many companies interested?
How does factoring work?
If you’re unable to fund your WCR, or if you’re short on cash, it’s not necessarily because you’re not selling enough. Often, it’s rather because your clients aren’t paying you, or are paying you late. That’s where factors come in. Basically, factoring means that you will give your debt obligations to these companies, and, in exchange, they will pay you all the money that your clients owe you upfront (minus a certain factoring fee).
What are its advantages?
In practice, it’s actually very rare for clients to pay you as soon as they receive a bill. Often, they’ll pay you as late as possible, and that can be up to 60 days after you sent your bill. Not to mention, there’s also the risk that your clients will never pay you at all. Because the WCR is such an immediate need for money, that can cause quite a bit of problems.
Factoring means that you won’t be the one who deals with will all of these risks and delays, so it’s quite useful.
What’s the advantage for the factor?
As stated earlier, factors deduct a fee from the money that they give you (it’s usually between 0.25% and 0.5%). Furthermore, these companies will generally closely analyze your debt obligations to see if they should factor of all your clients’ debt, some of it, or none of it.
As such, factoring isn’t always an option, and when it is, the fees can add up and make you lose quite a bit of turnover. However; it’s still very much worth your time to analyze this option, as it could be the thing that saves your companies from its expenses!
