Factoring: An Institution Of Short-term Financing For The Business
University of Macedonia
Dpt of Accounting and Finance
156, N. Egnatia str.
Abstract: The institution of factoring, which concerns the redemption of a business’
enterprising claims aiming at their administration, collection, financing and insurance
covering, is a basic tool for the promotion of its commercial activities at national and
international markets. When a business realizes credit sales and uses factoring, it is released
from having to evaluate the credit worthiness and solvency of its clients. Hence, the
management of the business can concentrate more and with less cost on its main mission,
which is the improvement of the quality of goods and services, the attraction and
establishment of new clientele and the exploitation of new business opportunities. Therefore,
this brief presentation of factoring on national and international level contributes effectively
to its use by the businesses as a form of their short-term financing through the international
competitive environment, where it develops its commercial activity.
1. Legal Regulation, Definition, Scope
1. Legal Regulation
The law 1905/1990 “for the factoring agreement and other provisions”, as it stands
after the modification of certain of its provisions by the law 2367/1995, regulates the 1factoring institution.
Factoring (affacturage) is the agreement between the factor and one business with
which the factor agrees to undertake, in return of commission, the obligation to collect
the short-term pricing claims that the business has against its clients (debtors) from
the sale of goods and the provision of services to them, by offering to the business
administrating, financing and insurance services.
The contracting of a factoring agreement for the business-supplier aims at:
a. The liquidation of the business’ non-overdue claims against its clients in order
to find safe short-term financing means ensuring relative liquidity;
1 Initially, before the introduction of the law 1905/1990, the institution of factoring was founded either
by the article 681GCC for the contract of service (which regulates the simple factoring) or by the Acts
of the General Director of the Bank of Greece No 959/10.3.1987 and No 2168/8.1.1993 (which
regulates the complex factoring)
b. The business’ release from the administrating, accounting, legal surveillance
and the pursuit of its claims’ collection;
c. Business’ release from the risk of insolvency of its debtor client.
2. Object, Content, Characteristics
Object of the factoring agreement can be:
a. Factor’s claims against their domestic clients or even international ones from
export activities, as well as claims from abroad against their clients in Greece
from import activities (article 1?3 of law 1905/1990).
b. Agreements contracted between factors for the execution of the above
agreements and the exercise of the rights deriving from them (article 1?4 of
The content of factoring is especially the transfer of claims to the factor with or
without the reduction right, the authorisation for their collection, the supplier’s
financing by the discount of the claims, the accounting or legal surveillance of the
claims at issue, their administration, the total or partial covering of supplier’s credit
It even concerns claims which had not come into being when the aforementioned
contract was concluded during the legal period of the contract agreement, as well as
determination of the amount of the credit risk the factor has to cover every time (article
1?2 of law 1905/1990), under the form of special open account.
Factoring agreements are always in written form.
Factoring agreements must be notified in writing by the factor or the supplier to the
debtor. The notification may take place in any expedient way as long as it is instantly
Written communication to the debtor of the factoring agreement, as well as the
mentioning of the factor’s name on the receipt documents, are deemed as notification,
according to the article 2?2 of the law 1905/1990, as it stands today.
c. Consequences of the notification
According to the article 2?4 of the law 1905/1990, as it stands today, the factor does
not acquire the agreed claims against the debtor or any third party before notification.
And the debtor’s performance (payment) towards the factor before the notification
discharges the former in his relation with the supplier.
3. The Functions
The factoring agreement has three (3) basic functions: The administrating, the financing and
the insurance. The factor’s client has the right to choose one or all of these functions depending
on his business’ needs, which also determines the amount of the factor’s payment.
The administrating function consists of the accounting and legal surveillance of the
claim and the pursuit of its collection. The factor administrates the claims of his
supplier client by surveying the claims’ accounting movement, starting the legal
procedure of peremptory notice of the debtors and aiming at its judicial collection.
This function contributes to the rational financial administration of businesses that
do not have organized accounting departments and legal services.
It transfers to the supplier, on fixed intervals, reports in electronic forms with
elements relating to the claims that have been collected or not, the margin of advanced
payments granting, the account’s movement, the static elements relating to his sales.
It offers to the supplier a network of total information on the buyer and through this
way the supplier controls the buyer’s solvency.
The financing function consists of the ensuring of liquidity for the supplier-client by
the discount of his assigned claims, or by the advance payment of the value of the
claims to be collected, against commission and discount interest over their advanced
value. Therefore, it reinforces the supplier financially and broadens his credit capacity,
without resorting to the traditional means of banking credit.
The function of insurance consists of the undertaking of the risk involved in the
collection of claims. That is, of the credit risk, the insolvency risk of the supplier-
client’s debtors. In order to undertake the above task, the factor collects information
concerning his client’s debtors, estimates the financial status of his supplier-client, the
cycle of his supplier-clients, the kind and the amount of his supplier’s transactions.
The administrating function becomes complex and expensive when the claims to be
collected are of small value. In that case, the administrating cost for the supplier is
increased making factoring expensive and therefore, unprofitable. This fact is a
disadvantage of the factoring institution.
The above three functions (financing, administrating and insurance) determine the
classification of the factoring agreement into: genuine and false, with or without advance
payment. According to the notification or not of the factoring to the debtor, it is divided into:
disclosed or open and undisclosed or confidential. Furthermore, the debtor’s installation area
divides it into: domestic and international export or import factoring.
5. The Parties’ Relationships
Based on the factoring agreement the relationships between factor-supplier, factor-
debtor and supplier-debtor are derived.
2. The factor
The factoring agreement is executed only by banks settled and operating in Greece
legally or by factoring companies limited by shares, having as an exclusive purpose the
exercise of this activity (article 4?1 of law 1905/1990, as it stands today).
2 These companies are founded with special license by the Bank of Greece, which is 3published at the Government’s Gazet. They have invested equity capital in cash
amounting at least half of the minimum equity capital required for the establishment of
a bank corporation. Exceptionally, it is required the covering up to the half of the
equity capital by contributions in kind, as long as this will be used by the company
itself to cover its needs. The shares of the above company are nominal and for their
transfer is required a previous license by the Bank of Greece, with the exceptions of
hereditary succession and parental granting, if the acquirer of them through this
transfer has total shares that represent a percentage greater than 10% of the equity
capital (article 4?5, a and b, of the law 1905/1990, as it stands today)
The Bank of Greece exercises supervision and control on the factoring companies.
This control is being exercised by the members of SOE (Soma Orkoton Elegton =
Body of Public Accountants) (article 5 of the law 1905/1990).
The factor-supplier relationship is a mixed agreement, known as framed
agreement with the following characteristics:
? Credit agreement
? Promissory note to give the claims to the factor
? Continuous relationship
In every case, the agreement includes specific terms of cooperation between the
two parties, through which derive obligations (and respective rights) are derived for
both of them.
b. Factor’s obligations
The factor’s obligations according to the factoring agreement are:
? The undertaking and the advance payment of the claims conceded to him;
? The execution of the undertaken services on the company’s behalf;
? The pursuit of the claims’ collection by the supplier in case of the false factoring
c. Supplier’s obligations
The supplier’s obligations according to the factoring agreement are:
? The liability of the supplier to the factor for the existence and the exact context of
the agreed claims which constitute the subject-matter of the factoring agreement.
? The concession of the claims to the factor and their placement in his disposal with
all the appropriate documents and information, the latest by the time the factor has
the right to exercise his rights from the agreement (article 3?2 of the law
? The payment of the agreed fees.
? The acceptance of a services’ denial by the factor for a claim whose collection and
follow up procedures are unprofitable for him.
? At a genuine factoring agreement, the supplier does not take the debtor’s solvency
risk. He is only responsible for the claim’s collection and the existence of appeals
2 According to the article 4?2 b of the law 1905/1990, this license is required even for the conversion
of an existing company into a factoring company limited by shares. 3 The granting terms of the operation license by the Bank of Greece are not regulated by the law but oby an Act of the General Director of the Bank of Greece n 2168/8.1.1993
against him concerning the conceded claim (articles 467 & 420 G.C.C. (Greek Civil
? At a false factoring agreement, the supplier takes the debtor’s solvency risk. This
means that in case the conceded claim is not collected by the factor, he (the supplier)
is obliged to give to the factor the amount of the claim (articles 806 & 421 G.C.C.).
4. Factor and debtor
According to the article 2 of the law 1905/1990, after the notification of the claim to
the debtor by the factor of the supplier, the factor has the same legal position with his
supplier-client, so the debtor pays the factor validly and has all the appeals that had
against the supplier before the denunciation (article 463 G.C.C.).
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