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Factoring
Factoring services can be useful for any company that sells goods or services based on deferred payment terms or that, based on the nature of its business, is primarily a buyer benefiting from deferred payment terms.
Please take a look at the series of questions and answers below that may help you with factoring operations.
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Who is the Adherent?
The Adherent, or the Supplier, is a company that, given its business model (which is providing its clients with deferred payment terms), becomes entitled to certain receivables. In order to obtain immediate liquidity, but also to improve speed of collection, the Adherent gives the receivables to the Factor.
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Who is the Factor?
The Factor is a bank, or a non-banking financial institution, specialized in factoring services. As such, the Factor can pay to the Adherent the value of the eligible assigned receivables, before or upon due date, subrogated to the rights of the Adherent, and, therefore, collecting such receivables as rightful owner, from the Assigned Debtor. Such payments will be made under a pre-defined Assigned Debtor limit and at a cost.
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Who is the Assigned Debtor?
The Assigned Debtor is the Buyer / Beneficiary / Importer of the Adherent’s goods and/or services. The sale of Adherent's goods and/or services generates the receivables assigned to the Factor.
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What does “recourse” refer to?
When the Factor does not provide the Adherent with a non-payment risk coverage service, or when a commercial dispute that affects invoices for which the Factor advance funds is solved in Debtor’s favor, the Factor has a recourse right againts the Adherent for such amounts. In practice, this means the Factor can ask the Adherent to reimburse any amounts advanced againts receivables affected by commercial disputes or the payment of which is delayed by the Debtor over the grace period granted by the Factor to the Adherent.
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How is the Factoring Limit calculated?
The essence of the Factoring Limit and what differentiates it from other short term financing limits is its capacity to cover, at any given time, the value of goods/services invoiced and not collected from a certain Assigned Debtor.
The value of the limit is set for each Assigned Debtor, based on:
- the estimated sales volume to that partner (including VAT where the case)
- real payment term
- business seasonality (peak sales periods)
- works and invoicing schedule for specific contracts
Factoring Limit = Estimated Turnover x Real Payment Term /360
Example:
Estimated Yearly Turnover = RON 2,400,000
Contractual Payment Term = 30 days
Real Payment Term = 45 days
Seasonality: June-September (120 days) account for 70% of total yearly turnover
Factoring Limit = LEI 2.400.000 x 70% x 45 / 120 = LEI 630.000
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Why does the Factor apply VAT to its price?
Although factoring products have a financing component, they do not represent a traditional financing, but are closer to services rendering. Consequently, according to the Fiscal Code (Law 571/2003), corroborated with the provisions of HG 44/2004 with regard to the Fiscal Code and the relevant application rules, Art. 141 paragraph 2, point 35, the VAT tax base for factoring services is the value of the service, i.e. the commission applied by the assignee, including the component afferent to the financing service.
The VAT consequently applied does not represent an extra cost. The Factor issues, at the end of each month of contract, an invoice reflecting the VAT relevant for the services rendered during that specific month. This VAT amount is deductible, according to the legislation in place.
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What if the Debtor included a non-assignment clause in our contract?
The assignment under a domestic (both Supplier and Debtor are legal persons residing in Romania) factoring transaction cannot be banned, according to the Civil Code (art. 1.570, 1.573 and 1.578), any contractual clause stipulating such a provision being null and void:
Art. 1.570 Civil Code – Inalienability Clause
(1) The assignment that is banned or limited by means of an agreement between the assignor and debtor does not have any impact on the debtor unless:
a) the debtor agreed to the assignment;
b) the ban is not expressely mentioned in the document attesting the receivable and the assignee was not aware and was not meant to be aware of the existence of a ban at the time of the assignment;
c) the assignment regards a receivable that regards a sum of money.
The above provisions are not applicable to Public Institutions Debtors as the assignment of receivables against them is regulated by a special law, Law 121/2011. Art. 61 stipulates that, for the assignment to be oposable to the Debtor, its prior, written consent is required.
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Is my client’s consent required for an assignment?
The assignment is oposable to the Debtor:
- when a written Notification of Assignment, on paper or in electronic format was received by the Debtor; such a Notification should include details such as the identitiy of the assignee, should reasonably identify the assigned receivables and indicate to the debtor that they should pay in favor of the assignee &
- the assignment is published (in AEGRM – the Electronic Archive of Real Movable Collaterals)
- independent from any refusal of the Debtor or contractual clauses banning it.
The above provisions are not applicable to Public Institutions Debtors as the assignment of receivables against them is regulated by a special law, Law 121/2011. Art. 61 stipulates that, for the assignment to be oposable to the Debtor, its prior, written consent is required.
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Why are CECs not accepted as payment instruments for factored receivables?
- CECs are at sight payment instruments and cannot have a due date in the future (like promissory notes can); thus, CECs can’t be used for deferred payments, specific to factoring transactions. In 2008, OUG 38/2008 changed Law 59/1934 with regard to CECs and banned their post-dating (previously allowed), with the clear intention of clearly establishing CECs’ role of payment and not credit instrument.
- The above change was reflected into practice by the ban on presenting for payment a CEC bearing a due date that follows its issuing date, the CEC’s due date being the same as its issuing.
- When an invoice payable by CEC is assigned to the Factor, the CEC needs to be indorsed in the Fctor’s favor, the endorsement date being the assignment date and not the future date born by the CEC; as such, the post-dating of the instrument becomes obvious and the real issuing date of the instrument uncertain. The endorsement date will also be considered the issuing (and due) date. The consequence of not submitting a CEC to the bank wihtin a 15 day from its issuing period, is the loss of recourse right against the endorsing and guaranteeing party, but also of the possibility to obtain payment by means of foreclosure, should the issuing party refuse to pay on its own intent.
- Please note that, althoug the right to request payment survives the CEC’s payment date, the issuing party is entitled to revoke the CEC payment order and, should their accounts not provide for the funds necessary to cover the payment, the owner of the CEC (the Factor) will lose the right to go against them.
- Another issue to be carefully considered is that of the mandate given to a certain person with regard to CECs signing; the mandate valid at the deffered payment’s date may differ from the one valid at the real issuing date and, in this case, the bank will not process the payment despite funds being available.
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What should I do if receive a 3rd party garnishment notice?
According to OG 92/2003 on the Fiscal Procedure Code, when a company (the Supplier) does not fulfill its obligations to the local and central state budget, the fiscal authorities are authorized to start forced execution procedures, including applying a garnishment on 3rd parties (debtors) againts which the Seller has uncollected receivables.
In such a case, if the respective Debtor had previously received a Notification of Assignment, stating that its debts to the Supplier became the object of a factoring contract, the Debtor has the obligation to inform the fiscal authorities that they no longer have debts to the Supplier, but to the Factor who granted a factoring facility to the latter. As such, the payment obligation of the Debtor to the Factor cannot be impacted by any later garnishment notification, regardles the enforcing party.
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DOMESTIC FACTORING I am a company that sells a wide variety of products and services to clients who, in order to pay me, are requesting different terms, not being able to pay me upon delivery. I cannot provide the bank with collaterals, but I need financing to support this gap between the moment my expenses need to be covered, and the time clients honor their obligations to me. Some of them even delay the payment and I have doubts about their financial standing and stability. What solution do you suggest?
When talking about factoring, we do not refer to a simple financing facility, but rather to a package through which you can access ledger administration and receivables collection services, credit risk protection, as well as the possibility to collect your domestic market receivables ahead of their due date with the support of the Bank.
How does it help me?
- It transforms my deferred payment receivables into immediate liquidity, without the need for collaterals or funds usage explanations;
- It improves my balance sheet indicators;
- I have access to a flexible financing structure, that takes into consideration the seasonality of my business and its general development;
- I can provide my clients with deferred payment options while controlling the cost I thus incur;
- I can obtain early payment discounts from my suppliers;
- I outsource receivables management activities to the Bank;
- I can attract new clients, without assuming any non-payment risk.
How does it work? What are the steps?
As member of the Romanian Factoring Association’s Board of Directors, we have quick access to market data, trends and developments, as well as to changes in the relevant legal aspects. All these translate into an increased flexibility in answering your requests in a constantly improved manner.
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EXPORT FACTORING I am a company that sells a wide variety of products and services to clients outside Romania who, in order to pay me, are requesting different terms, not being able to pay me upon delivery. At the same time, I do not have the necessary resources to check their financial standing, let alone go against them in a court of law in their country in case they do not pay me. I need financing to support this gap between the moment my expenses need to be covered and the time clients honor their obligations to me, and, moreover, I need to make sure I get paid if I meet my obligations. What solution do you suggest?
When talking about factoring, we do not refer to a simple financing facility, but rather to a service package through which you can access ledger administration and receivables collection services, credit risk protection and the possibility to collect your international receivables ahead of their due date with the support of the Bank. Export factoring transactions are handled by the Bank in cooperation with another factoring company, located in your client’s (the Importer) country.
How does it help me?
- It transforms my deferred payment receivables into immediate liquidity, without the need for collaterals or funds usage explanations;
- It improves my balance sheet indicators;
- I have access to a flexible financing structure that takes into consideration the seasonality of my business and its general development;
- I can provide my clients with deferred payment options while controling the cost I thus incur;
- I can obtain early payment discounts from my suppliers;
- I outsource receivables management activities to the Bank;
- I can attract new clients, even on new markets, without assuming any non-payment risk.
How does it work? What are the steps?
As member of Factors Chain International, we have access to an over 270 companies network covering more than 70 countries, which are available to manage the relationship with your international clients, thus eliminating an important set of linguistic and cultural barriers. Moreover, by using the Edifactoring system, we are able to improve collection, nomatter where the funds arrive from.
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IMPORT FACTORING Some of my suppliers are located outside Romania. Since they do not have the necessary resources to check my financial standing, they are afraid I may not pay them and thus refuse to grant me deferred payment terms or send me goods over a certain credit limit. At the same time, my clients are asking me for deferred payment terms since they are unable to pay me at delivery. What can I do to convince my suppliers that I am a credible client? What solution do you suggest?
Import factoring transactions are handled by the Bank in cooperation with another factoring company located in your supplier’s country. Factoring services can support importers in increasing their supplier credit value, as well as their payment terms, thus eliminating the cash-flow pressure on the company.
How does it help me?
- I benefit from deferred payment terms from my suppliers;
- I can increase acquisitions from my suppliers and consequently obtain better prices;
- I can enter into business relations with suppliers unaware of my payment capacity and behavior;
- I can provide my clients with deferred payment terms, based on the payment terms obtained from my suppliers;
- I communicate in my own language with the Bank;
- I pay to a Bank in my country, therefore I do not bear an international payment commission.
How does it work? What are the steps?
As member of Factors Chain International, we have access to an over 270 companies network covering more than 70 countries, which are available to manage the relationship with your international clients, thus eliminating an important set of linguistic and cultural barriers. Moreover, by using the Edifactoring system, we are able to improve payments processing, no matter where the funds need to arrive.
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REVERSE FACTORING I am a strong company, with a solid financial standing, even enviable I could say. I have a wide portfolio of suppliers, most of them companies smaller than me and not having a financial standing as good as mine, even if a stable one. My treasury policy requires me to obtain longer payment terms, and in order to support my request in this respect, my suppliers need financing solutions. I want to help them obtain the necessary financing level in a timely manner and offer them much better costs than they could obtain by themselves. What solution do you suggest?
Based on a reverse factoring agreement, made between you and the Bank, you will be provided with a without recourse factoring offer, which you can present to your suppliers. The factoring services will be provided to them by the Bank, within the limits you agree with, while the costs will be set based on the financial performance confirmed with you.
How does it help me?
- I benefit from defered payment terms from my suppliers;
- I can increase acquisitions from my suppliers;
- I can benefit from better prices and even discounts for early payment;
- I can make a single payment for several suppliers;
- My suppliers will be happier and more loial, since they will be able to access considerably lower financing costs and thus increase their business;
- I can extend my payment terms even without having to change the terms of my commercial agreement by accessing a maturity factoring option.
How does it work? What are the steps?
In any UniCredit Bank branch, the general factoring activity being coordinated by a specialized department, located in Bucharest, that you can contact at:
Phone: |
+40 21 200 1698 / +40 21 200 1569 / +40 21 200 1746 / +40 21 200 1489 |
Fax: |
+40 21 200 1692 |
E-mail: |