Topic 25. Factoring

1. Factoring (F): concept and types

F - a multi-purpose operation related to short-term lending to a client through the acquisition of debt obligations from buyers of products, services, works, suppliers of raw materials, equipment; with the insurance of the bank's clients against the risk of non-payment by their partners or the risk of non-payment by the clients themselves in relation to their suppliers and creditors; with control over the financial condition of suppliers and the solvency of buyers; with the organization of accounting for the movement of products and payments for it; with advising bank clients in terms of sales and advertising of goods, works, services.

Factoring criteria (convention adopted in 88 by the International Institute for the Unification of Private Law, “On International Factoring”):

1) providing lending in the form of advance payment of business requirements, 2) maintaining accounting records for the supplier, including accounting for products, services, and works sold, 3) collecting the supplier’s debt, 4) insuring the supplier against credit risk.

Participants in the factoring operation:

1) factoring department of CB or a special factoring company, 2) product supplier, 3) product buyer 4) additional participants:

a) a commercial bank that provides borrowed sources, or participates in the management company of a subsidiary factoring company. b) an insurance organization that insures the risk of damage to transported goods.

2. Types of factoring

1) Full service agreement. It includes: protecting the client from the risk of non-payment on the part of the buyer, organizing accounting for sold products and the state of receivables, providing the client with funds by prepaying the debt obligations of his buyers. Advance payment can be made in accordance with the agreement on a certain date or after a specific period of time from the moment of purchase (sale) of debt obligations (more often on the 3rd working day). The preliminary sale and payment of debt obligations may be carried out in the full amount of debt obligations or in part thereof. Full advance payment is carried out only in relation to the most reliable clients, since the risk of the bank increases. The remuneration for factoring comes from the client as a separate fact, as a result of which, in case of violation of the terms of the contract, the problem of cost compensation (for a loan and %) increases dramatically. Therefore, the advance payment is usually 70-80% of the amount of debt obligations. The rest of the amount of debt obligations is reimbursed by the client minus the factoring fee after receipt of payment from the client's buyers to the account of the factor department.

2) Open F - the client's partners are notified of the existence of a factoring agreement. By a special telegram or letter, they are informed about the change in the account details, payment for which is now carried out to the address of the factor department.

3) Closed F (more expensive than open) - funds from payers still go to the client's account, which transfers them to the factor department with the addition of a commission. Here the process of circulation of funds is slowed down. The factor department needs additional funding for operations and the risk of non-payment increases, since claims from other parties may appear on the client's account.

4) F with the right of recourse. The factor-department can return the debt-obligations to the client if the payer refuses to pay. But the department does not return the commission (the view is beneficial for the bank).

5) F without the right of recourse. The Bank fully assumes the risk of non-payment by the payer. The Bank bears the costs of defending its interests in court.

6) International F. One of the partners is a non-resident of the Russian Federation. Here, in addition to the usual risks, currency, postal and transfer risks are added.

Authors: Shevchuk D.A., Shevchuk V.A.

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