3.4 Management of Working Capital 53Factoring and block discounting of receivables. Block discounting is basically
a form of factoring.^123 In the British market, block discounting refers to a form of
discounting of consumer receivables. It is used by traders who supply goods to
consumers on hire-purchase, credit-sale or rental and wish to obtain immediate
payment instead of collecting instalments and rentals as they fall due.
The block discounting agreement is a master agreement which fulfils the same
function as a factoring agreement. Under the block discounting agreement, the
trader sells its rights under certain contracts to a finance house at their discounted
value. Agreements are sold or offered for sale to the finance house in batches
(‘blocks’) at agreed intervals. The trader guarantees performance by its customers
and gives the finance house an indemnity against loss. No notice of the assignment
is given to the customer, because the trader does not want customers to know of
the involvement of the finance house and the finance house does not want the
bother of collecting large numbers of consumer receivables unless the trader de-
faults.
This means that, under English law, the assignment of the receivables takes effect “in eq-
uity” only and is an “equitable assignment” rather than a “legal assignment”. For the en-
forcement problems caused by lack of notice, see Volume II.
Costs and benefits. The price paid by the factor is the nominal value of the receiv-
ables less costs (including financing costs for earlier payment) and a premium for
default risk. Payment terms can depend on whether the parties have agreed on re-
course factoring or non-recourse factoring. For example, the factor can pay the
purchase price in full in non-recourse factoring. In recourse factoring, the factor
may prefer to pay, say, 90% of the price immediately and the remaining 10% to
the extent that debtors have paid up.
Although factoring can be expensive, factoring can bring many benefits. (a)
Banks usually seek to take collateral in order to mitigate the risk of default, but
factors neither lend money to clients nor seek collateral, additional to the assign-
ment of the invoice. (b) Factors may also offer one or a combination of credit
management services (service function): collect payments from their customers;
pursue late payers; provide advice to clients on credit management; and protect the
firm against bad debts. (c) The cost of hiring a qualified credit controller is miti-
gated by using a factor. (d) The use of professional credit management services of-
ten results in invoices being paid more quickly. (e) The factoring of an invoice and
the money paid by the factoring company can make it easier for the firm to qualify
for a supplier discount (perhaps as high as 5% of gross invoice value) for prompt
payment.
Legal aspects. Legally, factoring is a sales contract between a buyer (the factor)
and a seller (the client firm) and means the assignment of certain receivables. As
(^123) See The Law Commission, Registration of Security Interests, paragraphs 6.28 and 6.29.