Factoring

Factoring is a financing arrangement in which the financing company grants a company credit in exchange of the company’s accounts receivable. The company then includes a note on its invoices, instructing the payer to credit the payment directly to the financing company’s account.

From a company’s perspective factoring means that it will receive partial payment for its invoices from the factoring company, before the actual due date of the invoices. Normally, the financing company makes directly a payment of 80 percent of the total sum of the invoices that it has received and approved, while the remaining 20 percent is paid upon actual payment of the invoices by the customers. The financier charges a commission for the credit in accordance with a percentage, agreed in the factoring agreement, of the total amount of the sales receivables.

In a factoring arrangement, the credit risk, i.e. the risk for solvency of the borrower’s customer, remains with the borrower, although the factoring company normally assumes responsibility for collecting the debts from the customers. In practice, the receivables are accepted as collateral for the credit, in which case the factoring company will cover the credit losses caused by insolvency of the borrower’s customers by withholding payments received from other customers of the borrower, up to the amount of the credit loss.

Reborrowing of employer pension contributions paid in accordance with the Employee Pensions Act can also be regarded as a factoring arrangement. The Finnish pension insurance system includes the possibility for the employing company to obtain a loan against its accrued share of the pension fund contributions. Information regarding the accrued amount that the employer is entitled to borrow can be obtained from the insurance companies. The loans may be granted on one-off or continuous basis. As regards continuous credits, insurance payments are paid using the credit facility.

From a legal perspective, factoring constitutes a transfer of debts, the legal effects of which are determined in accordance with the Promissory Notes Act. This means that a factoring arrangement is binding on the sellers’ (i.e., the borrowers’) creditors and the buyer, subject to notification by the seller to the buyer, regarding the transfer of the seller’s receivables to the factoring company. In this case, the buyer is released from the obligation to pay only if payment is made to the factoring company. In normal situations, a note on the invoice regarding transfer of receivables to the factoring company can be deemed to constitute sufficient notice.