Factoring Agreements: Understanding the Process and Benefits
A factoring agreement can be defined as an agreement between a business (the client) and a specialized financial entity known as a factor or factoring company. In this agreement, the business agrees to cede a set of claims it holds over its customers to the factoring company. The factoring company, in turn, is obligated to provide the business with a range of services closely related to the assignment and remuneration of these claims.
Services Provided by Factoring Companies
Factoring companies offer various services, including:
- Management Services: The factoring company undertakes the management of the client’s portfolio of debtors, including the management and recovery of claims that the client holds against their debtors.
- Security Services: This service is characteristic of what is properly known as factoring without recourse. In this scenario, the factoring company has no recourse against its client if the debtor defaults. The factoring company assumes the risk of insolvency of the debtors of the receivables. Consequently, if these debtors (who were originally the client’s debtors) default, the factoring company cannot claim payment from its client. This service does not exist in what is known as improper or with recourse factoring, where the opposite occurs.
- Financial Services: The factoring company provides its client with financing by paying the client the value of the loan portfolio before its maturity. By paying the client’s credits before they expire, the business manages to convert short-to-medium-term operations into spot transactions. This represents an advance of funds that the factoring company provides to its clients in proportion to the appropriations agreed upon in the contract.
Contractual Nature of Factoring Agreements
Due to the wide range of services they provide, factoring companies are often considered to be involved in a partnership contract rather than a simple financing contract, as there is not always an advance of funds. In some cases, the factoring company acts in its own interest, such as when receivables are transferred to the factoring company pro soluto. In other cases, it acts in the interest of others, as in a discount contract, except when the assignment is considered proper factoring in the improper sense.
In general, a factoring contract can be characterized as:
- An atypical contract.
- A mixed and complex contract, incorporating elements of different contractual figures related to service leases, commissions, credit granting, credit transfer (pro soluto or pro solvendo), and credit insurance.
- A consensual contract, perfected by mere consent, even if typically formalized in writing, with broad general conditions preset by the factoring company due to the lack of specific legal regulations.
- A fixed, successive, and normative contract, establishing the framework within which subsequent performance must take place.
- A commercial contract, as it is a business contract requiring both parties to be businesses and concerning their respective commercial activities.
Regulatory Framework and Parties Involved
According to the Order of June 19, 1979, a factoring company is a funding agency, distinct from banks, savings banks, or credit unions. It must necessarily take the form of a limited liability company with a minimum capital. Its exclusive social purpose is the management of debt recovery, either on a commission basis or in its own name as the assignee of such loans. It also provides advances of funds on receivables and complementary activities such as market research, accounting and account management, business information, statistics, and similar services.
The client of a factoring company must also be a business engaged in commercial activity with its customers, from which it generates claims subject to billing, payment, and eventual disposal.