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The factoring contract. Main provisions

Updated on June 24, 2013

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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