Small and medium-sized enterprises (smes) are increasingly using factoring to increase liquidity quickly and cheaply. For this purpose, the creditors assign open invoices with payment terms of 30-90 days to a factor. The factoring company thus becomes the owner of the receivable. The details are set out in writing in a factoring agreement. The contract is not a legally regulated form of contract. The legal classification depends on whether it is genuine or non-genuine factoring.
Differences in the factoring contract for genuine and non-genuine factoring
With genuine factoring, the factor bears the del credere risk and thus the risk of non-payment. In non-genuine factoring, this risk remains with the creditor. If the debtor does not pay when the invoice is due, the creditor must repay the money received to the factor.
Legally, therefore, there are two different contracts:
: purchase agreement as sale of receivables pursuant to §§ 433 et seq. BGB
- Unreal factoring: loan agreement as a loan according to §§ 488 et seq. BGB
With the appropriate contract, the sale of receivables is handled quickly and easily. In this way, a factoring agreement differs from a loan agreement with a bank, for which a company must spend considerably more time and administrative effort.
General structure of a factoring contract
In practice, most companies opt for genuine factoring with the transfer of the del credere risk to the factor. Therefore, the creditor and factor conclude a sales contract.
The most important contents of a factoring contract include:
- Type of receivable: receivable from service or from delivery of goods
- Confirmation of the creditor that the claim actually exists (verity)
- Confirmation from the factor that he assumes the risk of default
- Financing amount in percent. As a rule, the factor transfers at least 80% of the invoice amount within 48 hours.
- Maximum amount of all receivables to be purchased
- Term of payment
- Factoring fee
- Interest rate
- Monitoring fee
- Settlement terms
Other conditions in the factoring contract
Factoring companies often offer contracts with a term of one or two years. The contract is extended by the respective term, unless one of the contracting parties terminates the business relationship with a notice period of three months.
Some providers suggest a preliminary contract to thoroughly vet both the creditor and the debtors. However, during the review period, the company may not enter into a business relationship with another factor. If a contract is signed with another provider after all, a penalty fee from the preliminary contract may apply.