Essential Aspects of Factoring Law for Businesses
What is factoring in a legal sense?
Legally, factoring involves the sale of a business's accounts receivable to a third party at a discount. This third party, known as the factor, provides immediate cash to the business, enhancing liquidity while assuming the risk of collecting the receivables.
How does the assignment work in factoring?
Assignment in factoring refers to the transfer of the seller's right to payment for invoices to the factor. This is usually done through a legally binding agreement which ensures all parties understand their rights and obligations, including the fees, advance rates, and recourse conditions of the factoring arrangement.
What is the difference between recourse and non-recourse factoring?
Recourse factoring means that if the debtor fails to pay the invoice, the seller must buy back the unpaid receivables from the factor. Non-recourse factoring, on the other hand, means the factor assumes the risk of non-payment, providing more protection to the seller but usually at a higher cost.
What legal protections do factors have in the event of debtor bankruptcy?
Factors can establish security interests in the receivables they purchase, giving them a legal claim and priority over other creditors in the event of a debtor's bankruptcy. However, these interests must be properly documented and perfected according to local laws for them to be enforceable.
How are disputes in factoring agreements resolved?
Disputes are typically resolved according to the dispute resolution clause in the factoring agreement, which may call for negotiation, arbitration, or litigation. The clause outlines the process for handling disagreements, with arbitration preferred for its speed and confidentiality, though litigation may be used if necessary.