Who is a factor?
A factor is called a financial institution that provides factoring services. The role of the factor is most often played by a bank or a factoring company that specializes in this type of service.
A factoring company is an institution that buys receivables from its customers, disburses funds for them, and then obtains payment for the financed receivables directly from the customers’ counterparties. The above definition can also be used to describe factoring in its classic form (overt factoring), but factors are also engaged in providing silent, maturity or commitment (reverse) factoring services.
Learn more about the types of factoring
Some factoring companies – such as PragmaGO – offer other services to their clients, such as the ability to buy back individual invoices or finance company purchases.
Who is the factor?
The second of the basic concepts of factoring is the factor. Who is that?
A factor is a businessman who uses a factoring service. It is worth remembering that factoring can be opted for by those entities that have receivables and want to sell them in order to immediately obtain the funds owed to them. A prerequisite for using factoring is that the receivable held must be unmatured.
Other requirements (regarding, for example, the company’s annual turnover or the number of customers) may be specified in the wording of the factoring agreement and depend on the financial institution providing the factoring and the parties’ individual arrangements.
Before the parties sign a contract, the factoring company (factor) will assess the liquidity of the company seeking factoring (factor).
Who is the recipient in factoring?
An important entity – in addition to the factor and factoring agent – that is worth mentioning, even though it is not a party to the factoring agreement, but participates in the process, is the recipient. The term refers to a businessman who owes a debt to a factor – it is the business transaction of the factor and the recipient that is the source of the receivable that the factor buys.
Factoring is a solution that allows entrepreneurs to recover a receivable from a debtor in various ways. Outright fact oring is de facto factoring where the factor takes over the receivable and pays the factor the funds, and then collects the receivable from the debtor on its own.
However, there is a second way through which the factor can recover money while not jeopardizing the relationship with the recipient – this is called secret factoring. In such an arrangement, the debtor does not receive information about the change in the owner of the debt – he will still pay the debt to the counterparty, except that the latter will then be obliged to immediately transfer the funds to the factor.
However, we are not talking about the recipient in the context of the factoring agreement, because – technically speaking – he is not an active party to it, but is only mentioned in the body of the document.
Factoring agreement
All three concepts we have introduced in this short article are derived not from legal definitions, but only from practice, i.e., factoring agreements already concluded.
The reason for this is that a factoring agreement is one of the unnamed contracts, which means that it is not regulated by the provisions of the Civil Code – the principle of freedom of contract applies to them (while complying with the applicable law).
The factoring agreement is entered into between the factor – who is the supplier of services and/or goods, and the factor – who buys the receivable from the factor. In practice, the factoring agreement assumes that the factor will assign the receivables (derived from each invoice) to the factor and then receive the funds less the factoring company’s commission. However, the factoring agreement can be expanded to include additional services and insurance.
Summary
Finally, for the sake of consolidation, it is worth summarizing in one sentence the relationship between the parties to factoring. A factor in factoring is a company that buys unmatured receivables from the factor from the factor’s transaction with the buyer. With this basic knowledge, understanding more complex factoring issues should be much easier.
