Factoring Agreement

In the United States, factoring is not the same as the interest rate charged (called the assignment of receivables in U.S. accounting, as the FASB claims within GAAP). [8] [1] Factoring is the sale of receivables, while the interest rate on the invoice (“assignment of receivables” in U.S. accounting) is a loan that involves the use of receivables as collateral for the loan. [1] However, in some other markets, such as the . B in the United Kingdom, the interest rate charged is considered to be a form of factoring in the “debt transfer” contained in the official factoring statistics. [9] It is therefore not considered a loan in the United Kingdom. In the United Kingdom, the agreement is generally confidential, as the debtor is not informed of the assignment of the debt and the seller of the debt recovers the debt on behalf of the postman. In the UK, the main difference between factoring and discounting is confidentiality. [10] Scottish legislation is different from that of the rest of the United Kingdom, since notification to the debtor is necessary for the transfer.

The Scottish Law Commission is reconsidering this position and intends to propose reform by the end of 2017. [11] In the 20th century, factoring was still the dominant form of working capital financing in the then-high-growth textile industry. This has happened in part because of the structure of the U.S. banking system, with its countless small banks and the resulting restrictions on the amount that could be carefully redistributed by one of them to a company. [28] In Canada, with its national banks, the restrictions were much less restrictive, so the development of factoring did not evolve as far as in the United States. Already at that time, factoring was becoming the dominant form of financing in the Canadian textile industry. Since this contract is your money, you want to fully understand it before you commit to a factoring agreement. Many factoring agreements have details and rules for the length of a factoring relationship.

Your company has the right to terminate a contract, but it is usually described in the section of the extent to which this must be done in advance. An important aspect of this term is that if one of your customers does not want to respect this stage of the factoring process, you need to know what will happen. Ask the factoring company how long it will give you to discuss it with your customer before the postman drops that account as a whole. However, most companies are able to successfully apply invoice calculation to their financing model. Factoring is common in the construction industry due to long payment cycles, which can extend up to 120 days and beyond. However, the construction industry has risky features for factoring companies. Due to the risks and exposure of mechanics` instructions, the risk of “paid” conditions, the existence of progress notes, the use of deductions and exposure to business cycles, most “general” factoring companies avoid construction requirements altogether. This has created another niche of factoring companies specializing in construction requirements. [36] If cash flows may decline dramatically, the entity will find that it needs large amounts of liquidity, either from existing liquidity or from a factor, to cover its liabilities during that period. Similarly, the longer a relatively small cash flow can last, the more cash is required from another source (cash assets or a factor) to cover its liabilities during this period.

As mentioned above, the company must balance the opportunity costs associated with the loss of a return on money that invests otherwise with the co-cost costs associated with the use of factoring.