The X Factor

How Tech and ESG are Enhancing the Treasury Benefits of Factoring

Factoring may be as ‘old as the hills’, but it continues to be an important and well-loved financing instrument for working capital management. BNP Paribas’ Lionel Joubaud discusses how technology and ESG components are helping to ensure the solution evolves for the modern age, making factoring more relevant than ever for corporates as their finances come under pressure amid a “perfect macroeconomic storm”.

Eleanor Hill, Editor, TMI (EH): Factoring is a long-established working capital solution. Considering corporates have so many sophisticated funding options available to them today, how relevant is factoring? Does it still have a unique appeal?

Lionel Joubaud, Global Head of Factoring, BNP Paribas, (LJ): If anything, factoring is now more relevant than ever, most especially for financing, protecting, and optimising the working capital needs of corporate clients.

To make this more concrete, let me share some statistics. Last year, BNP Paribas financed €200bn worth of turnover via factoring. And that was 25% higher than the previous year. This trend is certainly on the up!

Furthermore, in France and other countries, more and more corporate clients are leveraging our factoring capabilities for short-term financing – even in preference to regular overdrafts. So, yes, factoring is indeed proving to be a useful and pertinent instrument for today’s treasury functions.

EH: Impressive numbers indeed. What are the key drivers for corporates in choosing factoring? Can you point to recent, specific use cases, perhaps? 

LJ: Factoring is a very malleable solution for treasurers. It can be leveraged by both small firms and large corporates either for regular use or just at specific periods of need, say at the end of a quarter.

Businesses of all sizes also now appreciate that factoring is suitable at all stages of a company’s development and life cycle. A few decades ago, factoring tended to be mostly associated with companies in difficulties – those who needed a quick fix to tide them over. Now, however, it’s used by start-ups and fast-growing companies with high working capital needs. It’s also used in M&A operations for leveraged buy-outs and, of course, it is still a solution sought by companies needing to support a turnaround strategy.

In short, factoring is used by a wide range of companies for a variety of needs. It also has a domestic and international dimension. While many of our clients – the sellers – are located in the Eurozone, where we are present in 12 countries, their buyers may be based anywhere in the world. In this way, factoring has truly adapted to the modern global needs of corporates and investors.

Over and above that, the major driver for factoring today is of course the volatile, uncertain macroeconomic environment. Concerns about recession, inflation, and rising rates are putting additional pressure on working capital needs. It’s a perfect storm that has highlighted the need for – and benefits of – factoring.

EH: There are different types of factoring: recourse factoring or non-recourse factoring. For the benefit of readers that perhaps haven’t used factoring before, could you explain those terms? How do they differ? 

LJ: The difference between the two is actually quite marked, in terms of which party is responsible for customer non-payment.

With recourse factoring the business, our client, agrees to take full liability for the unpaid invoice. If the debtor fails to pay the invoice then the company has to repay the finance provider the value of the invoice. With non-recourse factoring the finance provider is liable for the unpaid invoice. The greater risk means fees can be higher, and there is more scrutiny of the debtor.

Also, if the factoring is with recourse there’s no protection, no insurance in case of default or bankruptcy of the debtor. With non-recourse there’s insurance brought by the factoring company and it can be treated as off balance sheet, which is of course important, especially for large corporate clients.

Most of BNP Paribas’ factoring business, around 80%, is non-recourse, though the balance between the two varies a little from one country to another.

EH: Earlier, you described the current operating environment as a “perfect storm” that benefits factoring greatly as working capital comes under pressure. There are many other funding solutions out there for corporates, though, notably via the capital markets. How well does factoring sit alongside them?

LJ: The key point to note is that factoring can be blended with other financial products, for example, inventory financing. By combining the two, a corporate can optimise receivables but also release trapped working capital on the inventory side. This is especially important now that many companies have moved away from a just-in-time supply chain approach to a just-in-case strategy.

Factoring can also be used with trade and supply chain financing, as well as cash management and payments solutions. That is why the BNP Paribas factoring team works closely with our trade and cash management colleagues. We also collaborate with a fintech, Hokodo, blending factoring with buy now, pay later solutions on B2B digital marketplaces, for example.

EH: Speaking about online marketplaces, e-commerce has come on leaps and bounds over the last 10 to 15 years and the outlook for its further growth is bright. How is the factoring industry coping with this huge surge? Will it be able to scale sufficiently and support all the cross-border trade that’s becoming possible via e-commerce?

LJ: B2B e-commerce is booming and there is always pressure on B2B sellers to streamline their order-to-cash experience. They want to offer the buyers good credit terms but at the same time also need to be protected from credit and fraud risk.

So, the main question here for factoring is not scalability because we already have experience of developing and launching sophisticated factoring platforms. And we are always improving them, increasing the volumes they can handle.

The two big issues when it comes to e-commerce and factoring are first, how quickly can we move towards real-time credit decision-making processes, as that is very important for B2B marketplaces? The second challenge is how do we go about integrating factoring into such ecosystems? Because it’s not just about factoring per se with B2B marketplaces. The solution needs to be integrated with a straight-through payment process.

As I mentioned, in collaboration with fintechs, such as Hokodo, and our payment teams, BNP Paribas is working to develop solutions to address these and other issues relating specifically to factoring for B2B e-commerce marketplaces.

EH: Technology is no doubt playing a major role in helping factoring to remain so relevant for corporates today. How critical is technology in the delivery and management of a modern factoring programme? And how has this changed over the years?

LJ: Technology is indeed extremely important for building and managing a factoring platform that can cope with very high volumes and is secure for all parties. Technology is also vital for enabling the platform to plug into external ecosystems – a capability in which BNP Paribas has invested a great deal and is still investing.

By “external ecosystems”, I am referring mainly to the ecosystems of our clients. These can comprise, for instance, online marketplaces, other banks’ platforms, or e-invoicing platforms. On the latter, this is a capability that we already have in place in Italy and our e-invoicing solution is being rolled out in France next year and then across the other European countries that we serve.

Typically, we are investing so that our platform plugs directly to the ERP or accounting system of our clients via, for example, an API. As such, it is now easier than ever to onboard new clients. 

EH: Elsewhere, I understand that BNP Paribas is keen to integrate ESG into the factoring wheelhouse. What progress has already been made on this front? And what do you think might be achieved in the future?

LJ: I wholeheartedly believe that factoring can help our clients on their sustainability journeys. But this is a nascent area for ESG – it’s just the beginning of sustainable factoring. That said, we have gained some valuable expertise from some deals we struck last year and the learning curve continues internally and with our clients.

At the moment, there are three main ways to develop a sustainable factoring facility. The primary one is to have a sustainability-linked facility which leverages ESG KPIs. These metrics can come from an external ESG rating agency or auditable internal KPIs provided by the client. Last year, for example, we implemented just such a facility with a supplier of a car manufacturer in Germany.

The second option is by way of use of proceeds so that the factoring facility finances something with a positive impact. We supported one such programme in Portugal last year for a renewable energy project, solar and wind farms specifically.

And the third way to implement a sustainable factoring facility is to leverage reverse factoring. Such a solution can help our clients to encourage their suppliers to come on board their ESG mission and obtain ESG ratings themselves, with the incentive that if they improve their sustainability performance they can access more favourable financing rates.

EH: Finally, Lionel, how would you sum up the outlook for factoring and its relevance as a modern financing instrument?

LJ: In my view, factoring has a very bright future. First, because it’s a well-established and well-understood solution that is highly adaptable. It has proved itself amenable to tech-led innovation, including in combination with APIs, and that has been key to its successful evolution for our digital age. The added ESG element is yet another demonstration of the flexibility of factoring.

And now, working with banks, fintechs are also helping to make factoring increasingly sophisticated and relevant through innovation. Given all of these drivers, there is no doubt in my mind that there is still plenty to come from factoring. Watch this space!