Standard definitions related to factoring services

Definitions in factoring serviceFactoring is one of the most useful financial products and operations used in Vietnam as well as other countries. Accordingly, organizations such as the Bankers Association for Finance and Trade (the “BAFT”), the Euro Banking Association (the “EBA”), the Factor Chain International (the “FCI”), the International Chamber of Commerce (the “ICC”) and the International Trade and Forfaiting Association (“ITFA”) have jointly drafted and published the Standard Definition for Techniques of Supply Chain Finance, including factoring services.

In this article, BLawyers Vietnam explains the terms and concepts related to factoring services mentioned in the document above.

1. Receivables or Accounts Receivable

Receivables or Accounts Receivable is a legal claim for payment from a seller of goods and/or supplier of services (the “Seller”) to its buyer for goods and/or services (the “Buyer” or the “Debtor”) related to the goods and/or services provided in accordance with the Buyer’s order execution.

2. Receivables Purchase

Receivables Purchase is a descriptive and convenient intermediate category for many other financial techniques, in which the Seller obtains financing by selling all or portion of their accounts receivables to credit institutions providing financial services. Therefore, the legitimate ownership of accounts receivable will be transferred to these credit institutions. Upon such a change in ownership, the Seller will receive an advance payment for the accounts receivable, including deposits or deductions, based on the quality of the accounts receivable and the price agreed upon between the credit institution and the Seller.

The Receivables Purchase is accomplished through four financing techniques (including variations) as follows:

  1. Receivables Discounting;
  2. Forfaiting;
  3. Factoring and its variations; and
  4. Payables Finance.
3. Invoices

Invoices are documents, or electronic records of documents, issued by the Seller to the Buyer to record and describe the transaction for the supply of goods or services, the price of the goods or services, and the request for payment with a specific deadline, mentioning the taxes that need to be paid to the competent authority and other payment terms.

4. Bad Debt

A debt that is difficult to collect because the debtor is unable to repay the debt when due.

5. Factoring

Factoring is a form of Receivables Purchase, in which the Seller sells their account receivables – represented by unpaid invoices, to credit institutions with a factoring service (the “Factor”). The characteristic feature of factoring is that the Factor is usually responsible for managing a portfolio of Buyers and collecting receivables. Accordingly, it protects the Seller in the event the Buyer becomes insolvent. In addition, factoring is usually disclosed to the Buyer.

6. Domestic Factoring

Domestic Factoring is a factoring service whereby the Seller and Buyer are in the same country. Country-specific rules and legal regulations may be applied to the nature of the domestic transaction, thereby affecting the relationship between the Factor, Seller and Buyer.

7. International Factoring

International Factoring is a factoring service whereby the Seller and Buyer are in different countries. Country-specific rules and regulations may apply due to the international nature of the transaction, thereby affecting the relationship between the Factor, Seller and Buyer. For this reason, there will usually be two Factors involved, one in the Seller’s country called the export Factor, and one in the Buyer’s country called the import Factor. These two Factors establish a contractual relationship or a corresponding relationship to serve the Seller and the Buyer, respectively – often referred to as the Two-Factor System.

Typically, these two Factors use a set of pre-established structures such as the General Rules for International Factoring (the “GRIF”) published by the FCI and the International Factors Group (the “IFG”).

8. Recourse Factoring

Recourse Factoring is a factoring service under which the Factor has the right to recourse to the Seller if the Buyer fails to pay the receivables.

9. Non-Recourse Factoring

Non-Recourse Factoring is a factoring service under which the Factor has no recourse right against the Seller if the Buyer fails to pay, limited to the established credit limit. Country-specific rules and regulations may affect the nature of the relationship between the Factor, the Seller and the Buyer.

10. Confidential or Non-Notification Factoring

Confidential or Non-Notification Factoring is a factoring service whereby the Buyer is not aware of the factoring agreement between the Factor and the Seller. Therefore, the Buyer usually pays into a trust account or an escrow account. In some cases, the Buyer may pay into a regular trading account in the Seller’s name, which acts as the Factor’s collection agent and commits to transfer the funds immediately upon receipt to the Factor.

11. Reverse Factoring

Reverse Factoring is a form of factoring where a factoring agreement is established between the Buyer and the Factor. Buyers are usually the ones who have the ability to pay or have a high credit score. Therefore, the Factor will offer each Seller of the Buyer to transfer their receivables (usually without recourse) to the Factor.

12. Disclosed or Notification Factoring

Disclosed or Notification Factoring is a factoring service where the invoice has a notice of the transfer of receivables. Accordingly, the Buyer is notified of the transfer of receivables from the Seller to the Factor. The Buyer then pays the receivables to the Factor to fulfill the payment obligation.

13. Whole-Turnover Factoring

Whole-Turnover Factoring is a factoring service when the Seller transfers all invoices to the Factor.

14. Selective or Spot Factoring

Under Selective Factoring, the Seller or the Factor selects a number of invoices to transfer to the Factor with certain common characteristics, such as a specific Buyer, the law governing the accounts receivable, production segment, etc. Spot Factoring is a factoring service that involves factoring of individual invoices.

15. Invoice Discounting

The Seller reports the unpaid amount of its receivables to the Factor. Accordingly, the Factor will finance a percentage based on the amount available to the Seller by selecting the invoice from the specific Buyer. The amount available to the Seller is adjusted based on the value of the receivable in the receivable ledger and adjusted for a margin of safety. The use of the term Invoice Discounting is similar, but not identical, to Receivables Discounting, which also has a synonym, Invoice Discounting.

Note: The above article by BLawyers Vietnam is published for information-sharing purposes, and not for commercial purposes. All copyright and intellectual property rights to the document “Standard Definitions for Techniques of Supply Chain Finance” and the terms presented in the article belong to the respective organizations BAFT, EBA, FCI, ICC and ITFA.

The above is not official advice from BLawyers Vietnam. If you have any questions or suggestions about the above, please contact us at consult@blawyersvn.com. BLawyers Vietnam would love to hear from you.

Date: 25 June 2024

Writer: Thai Bui

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