NATURE OF FACTORING

www.factors-chain.com/home
www.factoring.org

2009
 A US DEFINITION:

ƒ “a continuing arrangement between a factoring

concern and the seller of goods or services on
open account, pursuant to which the factor
performs the following services with respect to
the accounts receivable…”

1. Purchases all accounts receivable for immediate

cash [Transfer of ownership; right to receive  Finance
payment under law]

2. Maintains the ledgers and performs other book- Â Admin

keeping duties

3. Collects the accounts receivable  Admin

4. Assumes losses which may arise from the  Bad debt

customer's non-payment protection

2009
 UNIDROIT CONVENTION ON INTERNATIONAL FACTORING
International Institute for the Unification of Private Law (Rome)

ƒ DEFINITION: ANY 2 OUT OF THE FOLLOWING 4:

1. finance for the supplier, including loans and advance

payments

2. maintenance of accounts (ledgering) relating to the

receivables

3. collection of receivables

4. protection against default in payment by debtors

2009
 FEW COUNTRIES HAVE
RATIFIED THE CONVENTION

STILL A USEFUL BENCHMARK

FOR CONCEPTS

2009
 UK PRACTICE: MUCH BROADER

ƒ COMBINES ‘TRADITIONAL’ FACTORING WITH INVOICE

DISCOUNTING

ƒ WILL SEE THIS IN THE FACTORING AGREEMENT TO

COME

2009
 CONTRACTUAL AGREEMENTS

Debtor has not

agreed
Imposed by law
e s
oic
In v Pa
nt Ri re ym
e gh di
ym t re en
a to ct t
e-P co ed
Pr lle
ct

CREDIT
RISK
X
Payment Goods

2009
UK FACTORING
AGREEMENT
NON-RECOURSE
RECOURSE OPTIONS

DISCOUNTING
NO DISCOUNTING

DISCOUNT TO COLLECTION
DISCOUNT AT MATURITY

AGENCY
NO AGENCY

NO DISCLOSURE
DISCLOSURE

2009
 OPTION: If the Debtor defaults

NON-RECOURSE
RECOURSE

ƒ Factor looks to Client ƒ Factor accepts the risk of

ƒ Sells back invoice; Client Debtor’s default for Eligible
must pay Debts
ƒ Client retains risk of Debtor’s ƒ Provides Client with
default protection against bad debts
ƒ Factor’s credit risk is on ƒ Factor has right to collect
Client against Debtor
ƒ For Eligible Debts, Client has
no risk

Which option would the Client prefer?

Which option would the Factor prefer?

2009
RECOURSE FACTORING v INVOICE DISCOUNTING

What’s the difference?

2009
 OPTION

DISCOUNT TO COLLECTION
DISCOUNT AT MATURITY

ƒ Discount rate charged against ƒ Discount rate accrues day-to-day

invoice amount from day (like an interest rate) on invoice
Prepayment made until amount from day Prepayment
maturity date of invoice made until date of collection

ƒ This method prevalent in US ƒ This method prevalent in UK

ƒ Advantage to Seller: Charge ƒ Disadvantage to Seller: charge

is fixed; no more charge if continues to accrue if customer
customer pays late pays late

ƒ Disadvantage: No benefit to ƒ Advantage to Seller: Less charge

Seller if customer pays early is customer pays early

2009
 OPTION

DISCOUNTING
NO DISCOUNTING

ƒ Client does not need ƒ Prepayments made to finance

financing client’s business

2009
 OPTION

AGENCY
ƒ Client continues to manage as
agent Sales Ledger and
collections on behalf of Factor
– Payment direct to Factor; or
– Payment to Client as trustee
ƒ Advantage to Client: Minimal
interference by Factor in Client’s
business relationships (subject
to Factor’s direction or ending of
agency)
ƒ Client must have good
administration; monitor DSO and
receivables aging
NO AGENCY
ƒ Factor takes over all
responsibility for handling
Sales Ledger and collections
ƒ Factor interjects itself into
this aspect of business
relationship
ƒ Advantage to Client: relief of
administrative tasks
ƒ Advantage for Factor: greater
control

2009
 OPTION

NO DISCLOSURE
DISCLOSURE

ƒ Presence of Factor not disclosed ƒ Factoring disclosed by notice

of assignment
ƒ No notification of factoring to
customer
ƒ Factor’s rights preserved—
obtains ‘perfected interest’,
ƒ For clients who insist on not
I.e., can defend rights against
disturbing business relationship
3rd party claimants
ƒ Disadvantage for Factor: could
compromise ownership and
security rights

2009
 Some fundamental points

ƒ Finances only post-invoice contractual obligations

ƒ Factor needs confidence that Debtor accepts goods

ƒ There needs to be absence of continuing obligations by the

client after delivery of goods

2009
 BENEFITS TO THE TOURISM SECTOR

ƒ Potentially better financing

terms
ƒ Possible cost savings
ƒ (extended payment providing
approved by Factor)

2009
 COUNTRY BENEFITS

ƒ Import substitution

ƒ Foreign exchange reserves

ƒ Local economic development

2009
 USE & MISUSE OF FACTORING

USES ƒ MISUSES

ƒ Short-term ƒ MT equipment financing

ƒ Working capital financing ƒ Proceeds for capital

expenditures
ƒ Grow sales & business
ƒ Try to deal with existing bad
ƒ Manage receivables and debts
credit
ƒ Last resort financing (seller in
trouble, desperate for funds)

2009
Beginning of modern factoring—USA 19th C

USA c. 1830 ƒ USA—rapid development of

eastern seaboard
ƒ Imports from Britain & Europe
– Sellers had no local
knowledge
– Did not know customers
– Would have to keep
inventories in foreign country
ƒ Mercantile agents
– Took goods on consignment
– Sold on behalf of principal
– Some guaranteed payment to
principal
– ‘prescriptive right’ to
reimburse against proceeds
– Practice ahead of the law

2009
2009
FACTORING USED TO BE CONSIDERED
FINANCING OF LAST RESORT

HAVING BANKS LINES A SIGN OF

BUSINESS VITALITY

FACTORING: SIGNAL OF FINANCIAL

TROUBLES?; HAVE TO HAND OVER
ASSETS IN ORDER TO GET FINANCING

2009
BENEFITS OF FACTORING HAVE LED TO
GREATER USE AND ACCEPTANCE

2009
 FACTORING: DOMESTIC v INT'L
Source: FCI w ebsite
1400000

145,996 176,168
1200000

103,690

1000000
86,486

68,265
800000
EUR MM

International Factoring
Aggregate Domestic
600000
1,153,131 1,148,943
1,030,598
930,061
400000 791,950

200000

0
2004 2005 2006 2007 2008

2009
 700,000
DOMESTIC FACTORING

600,000

500,000

400,000
EUR MM

Collections
Non-Recourse Factoring
300,000
Recourse Factoring
Invoice Discounting

200,000

100,000

0
2004 2005 2006 2007 2008

Source: FCI website

2009
 INTERNATONAL FACTORING: THE 2 FACTOR SYSTEM

COLLECTION
ADMIN
Laws
BAD DEBT
FUNDING
Currencies
IPREPAYMENT

Right to collect
PAYMENT
Local market

redirected
Payment
INVOICES

knowledge

Credit
information

PAYMENT GOODS

2009

ƒ Los Angeles, CA
ƒ ‘Financing for the Produce,
Food and Agricultural
Industries’
2009
www.agricap.com
ƒ Peruvian Packaged Asparagus
Producer
ƒ The situation: A 20 year-old Peruvian
packaged food company, specializing
in canned asparagus, needed
additional working capital to
adequately finance its day-to-day
operations. A large portion of its sales
were to very good foreign (U.S. and
European) customers, however, its
existing bank was not willing to
provide financing on foreign
receivables.
ƒ The solution: AgriCap provided an
international factoring agreement for
the client, which gave it the liquidity
necessary to comfortably finance its
operations.
REVERSE FACTORING: BIG BUYER LOOKING
FOR BETTER TERMS

Debtor has not

agreed
Imposed by law
e s
oic
In v Pa
nt Ri re ym
e gh di
ym t re en
a to ct t
e-P co ed
Pr lle
ct

X
Payment Goods

RF programme Mexico: Nafin on-line factoring

www.nafin.com
2009
FARMER FINANCING IN THE CARIBBEAN

ƒ St. Lucia: Operative

programme with Oxfam GB

ƒ Jamaica: Building a
programme with Oxfam GB

ƒ Bsrbados: Barbados
Agricultural Development &
Marketing Corporation &
Enterprise Growth Fund Ltd

2009