The factoring contract. Main provisions
Factoring is based on a factoring contract by which a person (the client) cedes its receivables to a party (the factor), who assumes the responsibility of taking over the receivables in exchange for a tax, called the agio. Through the direct transfer of invoices, the factor becomes the owner of the receivables.
The purpose of a factoring contract is to permit a company to:
- delegate all or part of the administrative work on the clients account
- obtain a protection against the risk of non-payment
- obtain, if needed, an advance payment of its debts
The parties and their role
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he parties and their respective roles in a factoring contract are outlined below:
- the factor - usually a banking institution that buys the receivables that a company has over another one; it is a link between the client and the debtor;
- the adherent (the client) - the company from which the factor buys the receivables;
- the debtor - the company that has some debts towards the client.
- collect information regarding the financial status of the debtor
- determine the credit limit for each debtor and notify the client
- check the primary financial statements
- accept the documents related to the object of the contract
- guarantee the receivables up to the established limits
- pay the receivables immediately after receiving the invoices
- cash in the receivables
- keep the necessary evidences of the debtors
- send the client periodic evaluations of the debtors and the payments
- start lawsuit against bad debtors
- to send the factoring company the invoices issued for his debtors and any other documents related at the agreed dates in the contract
- to notify to the debtors of the factoring contract, when applicable
- to pay the factor's remuneration etc.
- the obligation to pay all the fiscal charges related to the execution of the contract and the factoring general commission (calculated on the total value of the invoice) plus a commission charged for the financing.
- start lawsuit against bad debtors
Cost components of factoring
The factoring is divided into two elements: financing and servicing. These two elements are also found in the remuneration from the client, accordingly:
Factoring commission, which is calculated as a percent of the total amount of all the invoices; some factoring companies have also a fee per document, document meaning the invoice. For quantifying the factoring commission the following are taken into account:
• Work volume: number of debtors and number of invoices
• Total value of the business: as the value of sales is bigger, the business is more attractive and profitable, hence the commission will be smaller
• Debtors' solvency: the credit risk associated with the debtors is directly proportional with the commission's amount
• Profit rate for the factoring company
Financing commission, which is calculated as an interest for the financing sums (i.e. 20%), for the financing period.
The factor obliges himself through the factoring contract to finance, collect the invoices, ledger the accounts receivable and protect the adherent against the risk of non- payment in exchange for a fee, called agio.
The agio includes the factoring commission, the financing commission and also other commissions and fees requested by the factoring company.
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