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Factoring An Institution Of Short-term Financing For The Business

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Factoring An Institution Of Short-term Financing For The Business ...

Factoring: An Institution Of Short-term Financing For The Business

    Thomas Hatzigayos

    Ass. Professor

    University of Macedonia

    Dpt of Accounting and Finance

    156, N. Egnatia str.

    54006 Thessaloniki

    Greece

    e-mail: lyroudi@uom.gr

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.

    2. Definition

     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.

    3. Scope

     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

1. Object

     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

    law 1905/1990).

2. Content

     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

    risk.

     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.

3. Characteristics

    a. Form

     Factoring agreements are always in written form.

    b. Notification

     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

    proved.

     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.

     1

    1. Administrating

     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.

    2. Financing

     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.

    3. Insurance

     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.

4. Classifications

     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

    1. Generally

     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

    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).

3. Factor-Supplier

a. Generally

     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

    agreement.

    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

    1905/1990).

    ? 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

     3

    against him concerning the conceded claim (articles 467 & 420 G.C.C. (Greek Civil

    Code)).

    ? 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.).

6. References

[1] Bazinas Spiros, The Factoring agreement according to the American Law: a new method

    of financing, DEET (Deltio Enosis Elinikon Trapezon = Bulletin of the Hellenic Banks

    Union), 1986, p.5

    [2] Bessis Philippe, Le contrat de franchisage, 1985

    [3] Bette, Actuelle Fragen zum Fractoring-Geschäft: Rechtpraxis und Rechtssprechung, 1980

    [4] Brink, Die Ottavva-Konvention über internationales Factoring, in: Finanzierung-Leasing-

    Factoring, Januar 1990, No 1, p.26

    [5] Coxan/Mackenzie J.A., International Factoring, Euromoney Publications, London, 1986

    [6] Georgiadis A., The Factoring, Nomikon Vima (Periodical Forum), 1988, p.149

    [7] Glomb, Finanzierung durch Factoring, 1969

    [8] Goode, The proposed new Factoring and Leasing Conventions, JBL, 1987, p.219

    [9] Liakopoulos Thanasis, The Factoring agreement, Epitheorisis Emporikou Dikaiou

    (Commercial Law Review), 1988, p.377

    [10] Malakos Pan., New financing institutions: Factoring- Forfaiting, 1990 (2) [11] Marinos Mihalis-Theodoros, Factoring agreement, article 1, law 703/1977, negative

    certification, Epitheorisis Emporikou Dikaiou (Commercial Law Review), 1989, p.504

    [12] Moore Carol G., Factoring- a unique and important form of financing and service, The

    Business Lawyer 1959, vol. XIV, No. 3, p.13

    [13] Moore Carol G. and Eleins M.A., International Factoring: The Practical Advantages,

    Uniform Commercial Code Law Journal, 1979, p.115

    [14] Piser S., Legal aspects of international factoring- An American concept goes abroad,

    The Business Lawyer, 1969-1970, vol. XXV, p.1505

    [15] Rebmann, Das UNIDROIT-Übereinkommen über das internationale Factoring

    (Ottavva 1988), RabelsZ, 1989, p.599

    [16] Salinger F.R., Factoring- A guide to factoring practice and law, Tolley Publishing

    Company Limited, 1984

    [17] Serick, Rechtsprobleme des Factoring-Geschäftes, BB, 1976, p.425 [18] Skalidis Lefteris Kampouroglou Gabriel, Commercial and Economic Law,

    International Encyclopedia of Laws, Kluwer Law International, suppl. 8 (Hellas),

    September 1997, No. 453-457

    [19] Stoufflet Jean, Les aspects internationaux de droit de l’ affacturage, PA, 22 Juillet

    1990, No 88, p.27

    [20] Themeli Chrissanthi, Towards a new transactions phenomenon : the Factoring, EE

    Arm, Epistimoniki Epetirida Armenopoulos (Periodical, Armenopoulos Year Book), 1988,

    p.153

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