The Law of Corporate Finance: General Principles and EU Law: Volume III: Funding, Exit, Takeovers

(Axel Boer) #1

52 3 Reduction of External Funding Needs


Factoring and invoice discounting are devices of particular value to small, fast-
growing companies that experience late payment problems and wish to release
funds tied up with debtors for use as working capital. Factoring and invoice dis-
counting tend to prove more expensive than bank financing but they allow busi-
nesses to grow in line with their sales. They can also be useful when the firm has
exhausted its overdraft facilities and cannot raise more equity from sharehold-
ers.^118
Recourse factoring or non-recourse factoring. There is a distinction between
recourse factoring and non-recourse factoring.
With non-recourse factoring, the factor absorbs the losses on bad debts, or at
least on some of them (del credere function). Non-recourse factoring is sometimes
called “genuine factoring”.^119
Recourse factoring enables the factor to recover from its business customer’s
account moneys advanced against what turn out to be bad debts. Recourse factor-
ing is the most common type of factoring transaction but not as “genuine factor-
ing” as non-recourse factoring.^120


For example, in the case of MKG-Kraftfahrzeuge-Factoring GmbH & Co. KG,^121 the fac-
toring KG had agreed with a GmbH to purchase, within a framework laid down by it in ad-
vance in each case, the debts owed to the GmbH by dealers arising from vehicle deliveries.
The factoring KG assumed the risk of default inherent in the debts acquired by it in that
way without a right of recourse against the GmbH. The del credere took effect if a dealer
failed to pay the relevant invoice 150 days after it was due. The factoring KG also agreed to
recover the remainder of the GmbH’s debts, but with a right of recourse against it, and to
manage the debtor accounts and provide M-GmbH with documents allowing it to ascertain
the position with regard to its business relations with each debtor. The factoring KG paid to
the GmbH the face value of the debts purchased by it in each calendar week, less agreed
charges, on the third working day of the following week. The agreed charges comprised
factoring commission of 2% and a del credere fee of 1% of the face value of the debts.


Full factoring or confidential invoice discounting. There is also a distinction be-
tween full factoring and confidential invoice discounting. In full factoring, the fac-
tor provides sales accounting functions, and the customers of the firm are in-
formed that their invoices have been assigned (notification). In confidential
invoice discounting, neither occurs, and the firm continues to collect payments
from its customers, but on the factor’s behalf.
Factoring and forfaiting. Forfaiting is a device that resembles factoring. It
means the discounting of individual bills of exchange or promissory notes on a
non-recourse basis. Forfaiting is typically used in large export trades (see be-
low).^122


(^118) Ibid, pp 112–113.
(^119) In German: echtes Factoring.
(^120) In German, it is called unechtes Factoring.
(^121) Case C-305/01 Finanzamt Groß-Gerau v MKG-Kraftfahrzeuge-Factoring GmbH & Co.
KG [2003] ECR I-6729.
(^122) See Cranston R, Principles of Banking Law. Second Edition. OUP, Oxford (2002) p
382.

Free download pdf