Factoring (finance)

Factoring ( Latin factura, "Invoice" ) is a anglicism for commercial, revolving transfers of receivables of a company (supplier, vendor) against one or more claim debtor (customer ) prior to maturity at a bank or a specialized institution ( factor). In recourse factoring the receivables to the risk of the receivable is transferred to the factor, the quasi-factoring this collection risk remains with the supplier. In both cases, the supplier is liable for the legal status of receivables, thus further supports the verity.

8.1 Selection factoring ( Selective Factoring, Factoring Clipping )
8.2 Open Factoring ( factoring Notification )
8.3 Silent Factoring
8.4 Semi - open Factoring

9.1 VOB Factoring
9.2 Single Factoring
9.3 Mietfactoring
9.4 Advocate and Tax Consultant Factoring
9.5 Reverse Factoring

General

Factoring is a financial services a source of finance for SMEs that serves their umsatzkongruenter operating funds. By recourse factoring will shorten its balance sheet receivables and liabilities and improve its liquidity position and capital adequacy ratio. They are also exempt from the administrative tasks of receivables management. Involved are the supplier ( vendor) who sells his "trade and services " to a factor (financial institution, in particular Factor - bank), and the claim debtor (customer, this is also available Client, connection company, client or user called ).

History

Precursor of the modern factoring found already among the Babylonians and Fuggers. As in 1771, the Swedish economist John Hartman Eberhardt the term delcredere defined ( " bad debts is the commission agent to acquiring risk the creditworthiness of the buyer or his ability, his debts on time to repay " ), was already established in factoring method for a long time. Already in 1677 there were 38 registered in London " Blackwell Hall " - Factors. In the U.S., the textile industry began in 1890 with the first organized factoring transactions. The modern, systematic form of financing of factoring therefore comes from the USA. First legal regulations that concerned the obligation to notify, made here in September 1949., In the U.S. under factoring only true factoring understood, it is referred to there during the quasi-factoring as " accounts receivable financing". The modern factoring arrived in November 1960 in the United States back to England.

In Germany, the first factor- contract should have been completed in 1958 by the Mittelrheinische Bank Dr. Horbach & Co. KG ( Mainz). At that time there were recognizable only a German -language publication on the subject. The German Factoring Association eV was founded in July 1974. He saw himself and his members still with serious legal obstacles faced, which made it difficult to spread this form of financing.

Legal bases

In Germany sat originating from the U.S., modern factoring by only since 1978, after two previously unresolved substantive legal issues had been decided by the Supreme Court. The Supreme Court allowed the judgment of June 1978 the conditional purchaser of goods, his claims from the resale - again - in the context of genuine factoring to a factor to sell and assign. The fully coated on buying legal basis assignment no newly established debt would be saved when non-recourse factoring, but it will made a fortune value exchange (claims for cash ). The assignment clause is to be construed as meaning to take in addition to the trade credit granted by for security money loan. A year earlier the Supreme Court had denied the moral standards of factoring by the collision with advance assignments due to an extended retention of title. The reverse, however, collides with the quasi-factoring advance assignments, is therefore immoral and subject to any prohibition of assignment. The quasi-factoring brings the factoring clients in the dilemma of choosing the conditional seller (ie the supplier) notify the factoring, since its extended retention of title would go in this case into the void ( breach of contract ), and to expose you to the risk of not being supplied to be, or to become due to fraud under § 263 StGB, as he had deceived implied, about the fact that he is no longer entitled to the claim by reason of factoring. This situation is viewed by the courts as unacceptable and therefore immoral. At the meeting of blanket or fake factoring with extended retention of title the first two securing means are therefore ineffective regardless of the priority principle.

Factoring is not expressly regulated by civil law in Germany and mostly internationally; rather, it is a typical traffic, the non-standardized contract praeter legem; it is a legal purchase pursuant to § 453 BGB. A legal validity of the seller by factoring arises buy legally from § 311a paragraph 2, sentence 1 BGB if the sold receivable does not exist, is not assignable or entitled third parties. Since it is a generic purchase factoring, a deteriorated a requirement can be replaced by a defect-free.

Are usual a framework agreement and subsequent single execution contracts. The Framework Agreement governs the contractual legal basis between the parties, and is usually associated with a blanket, while the execution agreements include specific purchases of receivables and thus the causal operations of the demand transmissions. If a claim under the factoring sold, then there is the available sales transaction in its assignment according to § § 398 et seq. Consequently, assignment of law applies, in particular, § § 401 BGB ( subrogation and all ancillary rights ), § 404 BGB (transfer of receivables with objections by the obligor ) and § 409 BGB ( notice of assignment ). In the quasi-factoring the available business does not consist of the assignment of the claim, but in a credit ( accounts receivable, collection order ) by the factor.

The Court considered its judgment of 26 June 2003 also considered that the non-recourse factoring, the factor assumes the default risk and thus its customers from the risk of non-compliance relieves. The distinction between purchase and loan is made in accordance with the case law in each individual case on the basis of an overall consideration of the contractual provisions. Here, the BFH has shut analogous to a forfeiting of lease receivables primarily due to the credit risk of the assignor. From a purchase is assumed if the risk of economic recoverability of the receivables (credit risk ) pass over to the buyer, so far as there is no possibility of recourse. The payment of the " purchase price " is the quasi-factoring is only a mere pre-financing of receivables whose assignment of performance only takes place ( § 364 para 2 BGB). In this case, a loan agreement is available.

In an ABS design is crucial if the " originator " have transferred as transferor of the receivables and the credit risk of the assignor, as is the case with the so-called "true sale".

Both real and artificial factoring are banking law according to § 19 paragraph 5 of the Banking Act to qualify as credit transactions. Borrowers in the non-recourse factoring is the debtor of the receivable acquired, the quasi-factoring the supplier. According to the legal definition of § 19 para 5 of the Banking Act the acquisition for consideration of claims, the seller is considered to be borrower if he is responsible for the fulfillment of the requirements or they must buy back. This is the case when spurious factoring. In recourse factoring of receivables debtor is considered to be borrower. Factoring is a financial services according to § 1 Ia 2 No. 9 of the Banking Act.

Completion

The Factors of the fees set is usually composed of a factoring fee on the sales and of interest on the undrawn liquidity. The factoring fee is justified mainly by the factor assumed by the default risk of the buyer (credit ) from the underlying non-recourse purchase and from the acquired servicing in the field of accounting and collection. As interest condition is usually a margin, according to the average collection period, agreed on the 3 - month EURIBOR.

The factor is security deposits to cover deductions of purchasers and dilution risk of the purchaser. For discounts and other immediate deductions such as debits and credits from Returns and Complaints a so-called purchase price retention is formed. This is formed depending on the purchased receivables on a daily basis and is usually between 10% and 20 %. It can also be made as, for example, warranty obligations additional withholding for counter-claims of the customers and other dilution risk. These are formed regardless of the amount of each purchased receivables. Exemplary demands of customers on payments from an annual bonuses or an advertising grant to be mentioned, which are not offset against payment of the respective debts.

Core functions and side effects of Factoring

The core functions of factoring financing, del credere and the acquisition of services by the Factor. On the basis of the receivables purchase is the factor usually an upfront payment of 80 to 90 percent of the amount receivable the client connection available (financial function). Due to the non-recourse sale of receivables, the risk of default (credit ) goes to the factor on ( true factoring, true sale ). Therefore, the seller of the receivables is secured 100 percent against bad debts. Furthermore, the factor also takes credit management for its subscribers ( full-service factoring). This includes accounts receivable, dunning and collection.

Due to the non-recourse purchase of receivables they are no longer activate in the balance of factoring clients. With a simultaneous reduction of liabilities, this results in cet. par. an overall reduction in total assets at the factoring clients. This results in the natural capital to a higher equity ratio and thus possibly a better (bank) rating. Through better rating are also better credit terms with other lenders can thus be achieved by factoring if necessary.

Composition in the costs of factoring

From these parameters, the cost of factoring calculate:

Factor Portable gross annual sales
Financing line ( purchased receivables x Bevorschussungsquote )
Number of customers
Number of invoices
Range of the assumed service ( full service factoring or in-house factoring)
If a credit insurance taken (two- contract model or a contract model )
Costs and benefits of the procedure

In the factoring process costs due to the factoring fee, the pre-financing interest rate and the Delkredereprüfung. The factoring fee is levied on the ( gross) revenues and moves in the order of about 0.25 to 1.0%. The following may apply: The higher the turnover, the lower the fee. For companies with less than € 2,500 thousand annual sales, the factoring fee may also be more than 1.0%.

The pre-financing interest rate is charged on the effective pre-financing period and is also billed requirement exactly. In a collection period of 38 days, for example, the interest rate falls on the Advancement of exactly 38 days. Typical interest rates range from 4.0 to 8.0 % and are usually linked to a reference interest rate ( eg 3M EURIBOR ). The trend of the interest rate is lower, the better the customer's creditworthiness. The Delkredereprüfung includes a credit check of the respective debtors. It falls annually to each customer and moves between 20 € and 60 € per customer and year.

The benefits of the procedure caused by the use of liquidity. Through the use of factoring first takes place in an asset swap ( demand for money ). Through the use of liquidity can or should result in the following effects:

If the liquidity used for discounting in purchasing, then are the costs of the proceeding against the discounts received. The effective interest rate of the factoring process should therefore be lower than the comparable supplier credit. Typical interest rates of trade credit between 20 and 60% / year.

By discounting and the repayment reduces the total assets and it cuts down the balance. By shortening the equity ratio increases.

Calculation example:

Annual turnover: 7,400,000 EUR

Factoring Fee: 0.34%

Interest p. a: 3.78%

Direct payout ratio: 90%

Minimum Factoring Fee: None

Factoring fee: 25.160 €

Interest costs p. a: 20,979 €

Total: 46 139 €

Costs in % of sales: 0.62%

Factoring forms according to the performance specifications

Forms according to scope

Open

Subsidiary

Genuine and recourse factoring

As a true factoring a method is called, in which the factor assumes the collection risk. By contrast, factoring is called without bearing this risk as recourse factoring. The quasi-factoring is mainly considered in the case law and literature as a loan, the assignment of the claim is done to secure the loan ( ie, the sum paid for the call ) and at the same time of performance ( provided that the requirement can be actually recovered ). In Germany, most non-recourse factoring is practiced.

Maturity Factoring ( factoring Maturity )

Factoring variant in which the factoring customer takes advantage of the full risk protection and relief with accounts receivable management, but waived the immediate regulation of the purchase price.

In-house Factoring (also bulk factoring or self- service factoring )

Although the factor assumes the collection risk, but restricts its service to strong. The Accounts Receivable including dunning remains with the customer. Only after completion of extrajudicial dunning procedure, the factor is responsible for collecting the debt.

Factoring forms according to the type of assignment of receivables

Selection factoring ( Selective Factoring, Factoring Clipping )

Normally claims against all purchasers are recorded with some exceptions to the factoring agreement. Reasons for exceptions may be, for example, counter-claims, fast payer, accounts receivable with a ban on the sale, customers, working in accordance with VOB or with down payments, private clients or customers abroad. When selecting factoring cooperation is limited in advance to certain debtors.

Open Factoring ( factoring Notification )

In the open factoring the customer is informed of the assignment of the claim. Payments on the debt are not possible with discharging effect usually only to the factoring company.

Silent factoring

When non-notification factoring the debtor is not informed of the assignment and sale of the claim, it remains invisible to him. The risk for the factor here is the inability to verify the claim, so that a customer could tender fraudulently non-existent receivables for purchase. Consequently, a factoring company will cooperate with the silent method only with proper addresses. With worsening economic conditions then likely to be the result, a gain of collateral.

Half - open Factoring

In the half-open factoring the debtor is not informed of the assignment of receivables, but you called him a number of account or a bank account to which he has to pay that part of the factor. This ensures that the payment reflux as directly as possible reaches the requirement owners.

There are other practices in the semi - open factoring, for example, if the debtor to pay by check.

Special shapes

VOB Factoring

Is a special solution for craft enterprises and companies in the area by subcontractors, the construction work on the basis of award and contract procedures (VOB ) position. Invoices according to VOB, as well as partial and progress payments, can thereby be brought into a factoring. May possibly occur reimbursements that are guaranteed by the Construction Contract procedures for building works to catch, a special depot is saved in most cases of the first payouts. This special Depot has usually a height of 5-15 percent of the total gross revenue from the company.

Single factoring

Meanwhile, financial service providers in the market that offer companies the opportunity to be covered by the sale of individual claims its short-term capital needs.

In the single- factoring or accounts receivable individual 's business foundation is a non-binding and free cooperation agreement. There are no fixed costs, the company decides which claim to sell it. Within a short time the amount due shall be paid immediately and improves the company's liquidity. As with the classic factoring the commercial risk ( default risk ) and the acquisition of the collection are included in the fees of the financial services. The single Factoring is therefore a flexible and cost-effective financing alternative at the same time the greatest possible independence from others. The previously tied up in receivables capital available to the company freely and regardless of the utilization available. In single- factoring the possibility is offered in addition to offset liabilities with their own demands.

Mietfactoring

A special form of single factoring is Mietfactoring for loss of rent. The landlord receives thereby the possibility to assign backward or absent rents receivable under defined conditions to the factoring company. In return, the landlord receives the purchase price of the receivables. This purchase price equal to the amount of the existing open rent due. The risk that the claim for lack of assets may not be realized going completely over to the factoring company.

Lawyer and tax consultant Factoring

The amendment to the Code of Conduct for Attorneys ( BRAO), the tax advisory Act (§ 64 ( 2) StBerG) and auditors (WPO ) this occupation groups were allowed the possibility of factoring. As a result of this change, competing suppliers were established lawyers and tax advising professions for the target groups. In need of consent is the assignment / sale of the fee requirement from a client to " third parties " such B factoring companies of SMEs and banks. Without the consent of the client fees demanded by professionals to professionals may be assigned. So, may assign an attorney, a tax advisor, for example, without this he needs the consent of the client.

Reverse factoring

As the name suggests, it involves a quasi " inverted" factoring. In contrast to the classical method, in which the factor of its customers buys receivables from their customers and financed, aims reverse factoring on the supplier side. Initiator in this case the customer who comes in this way to enjoy longer payment terms. He concludes with the factoring company a framework agreement, in which the factor required to pre-finance the receivables of the supplier. Supplier and factoring company sign then turn an additional contract, which includes only the claims against the initiator. The factoring company pays the appropriate amount immediately upon receipt or upon maturity of the invoice to the supplier.

Also when reverse factoring is the possibility that the factor does the commercial risk. In this case, we call the model often " Confirming ", a term which was certainly now taken from the Santander bank in fitting and is used as a brand name for a corresponding equity product.

Reverse Factoring helps especially small and medium enterprises in the shopping strategically important design flexible payment terms. International reverse factoring has since developed into an important payment instrument in foreign trade, which came partly in place of the letter of credit ( Letter of Credit ), because it is easier and less time-consuming to handle, and ( in the case of Confirming ) provides similar safeguards.

The model of reverse factoring originated about 20 years ago in Spain under the name Pago Certificado ( " certified payment " ) and has become worldwide with the strong international expansion of Spanish banks in recent decades, particularly in Latin America and Southern Europe widespread. It is particularly useful when the initiator (importer) comes from a country, be given in the usually very long payment terms ( are common as Spain 3-6 months), the supplier (about a German company ) because of his country can accept customary business practices difficult. In the classical Confirming the supplier can often choose whether he wants the Commitment of usually abroad ( importing country ) settled trust bank or factoring institution or prefers to get a related to the Factor abstract security which he in at a bank can redeem their own country.

Reverse factoring is often confused with Finetrading. However, the two alternative forms of financing differ both structurally and economically and legally, as the table below shows.

Framework agreement between finetrader and customers

Factoring agreement with a vendor and factoring agreement with customers including counter-signature of the supplier

Comparison of factoring and asset-backed securities

Both factoring and asset-backed securities are claims-based corporate finance. The main differences can be tabular form as follows:

Distinction between Factoring and Forfaiting

A forfaiting contract specifically includes certain receivables and is therefore legally qualify as a species purchase. Factoring contrast, refers to the purchase by later emerging at the time the contract is concluded as yet unknown claims and is therefore a genus purchase. This difference is expressed when the seller meets the demand for legal validity. If a claim is not sold or is it not transferable or is afflicted with exceptions, as the seller of the receivables factoring can replace it by any other requirement, at a forfaiting, however, it is according to § 311a paragraph 2, sentence 1 BGB liable for damages. Here is a case of initial impossibility, since the species purchase a deteriorated the requirement can not be replaced by a defect-free.

Fraud risk

Factoring and Forfaiting subject to the risk that the Factor Bank or the forfaiter be sold and assigned its claims, which do not exist. Although these risks include the legal validity of the receivables seller, but is ineffective when he has the purchase price proceeds received conveniently used foreign criminal intent. Spectacular fraud factoring (especially Balsam AG) have led to great damage because these forms of funding to facilitate a sale of bogus claims. The Balsam AG had claims " simply invented to get in the way of the sale to the Procedo GmbH cash. " In 1993, the fraud was on in June 1994. FlowTex sold drills, 85% of which did not exist in the sale- leaseback method. Factor or Fortaiteur have therefore permanently ensured by appropriate control measures to ensure that there is no dilution risk for them. In particular, can be obtained from the requirement debtors balance confirmation or acknowledgment of debt.

Federal Court of Justice of Germany Unconscionability Deception (criminal law) Federal Finance Court of Germany Equity (finance) Financial capital#Borrowed capital Gross (economics)

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