Factoring – a financing alternative for exporters

26 June 2003 (Invest Romania)

Once regarded as an intangible financing solution in Romania, factoring became lately a real trade finance alternative for Romanian exporters under the conditions of a more and more competitive market.

Despite its youth and lack of tradition in Romania, factoring has registered a tremendous development in the latest years the relevant market reaching an impressive increase in terms of turnover.

Notwithstanding this recent development of the market, the key players are still a few and mainly represented by commercial banks while other specialized financial institutions to compete the number of factors are almost inexistent. One important reason for such situation is represented, beside others, by the lack of specific regulation in the field as well as by the existing controversies with respect to the legal nature and regime of factoring.

In Romania, the regulation of factoring through legislative enactments is almost inexistent as the relevant regulations in force are limited only to define factoring as contractual instrument. Moreover, Romania has not ratified yet the international conventions on factoring (UNIDROIT Convention on International Factoring and United Nations Convention on the Assignment of Receivable in International Trade) establishing clear rules and regulations in this respect.

Given Romania’s current regulatory environment for factoring, the importance of factoring operations as trade financing alternative, its continuous growing popularity and benefits, the inapplicability ope legis of the international conventions’ provisions to the factoring agreements concluded in Romania, a special domestic regulation on factoring became a real necessity.

As legal nature, factoring is generally regarded as a credit – finance operation being mainly analyzed as a variety of debt assignment or by reference to the subrogation in the creditor’s rights, legal institutions provided by Romanian civil law. Although there are a few similarities between factoring and the two institutions, they can not be confounded as factoring has a special configuration and structure.

As contractual instrument, factoring is the agreement entered into between a party (adherent), provider of goods and/or services, and a bank or a specialized financial institution (factor), based on which the latest ensures the financing, maintenance of receivables and preservation against the credit risks, while the adherent assigns to the factor, under the title of sale, the receivables arising from the sale of goods or from the provisions of services to the third parties.

Within the classic structure of factoring, the factor is to perform at least two of the following four functions: finance for the supplier, maintenance of receivables accounts, collection of receivables and protection against the default in payment by debtors. Preservation with the factor of the non-payment risk is not compulsory according to the law or of the essence even the most used factoring type supposes such preservation (including the risk of debtor being insolvent).

Unfortunately, almost all the existing factors in Romania are still limiting their factoring services to financing while integrated factoring services are not offered yet on a regular basis. Given the above, we would strongly recommend a clarification and completion of the legal framework governing factoring in Romania as this would bring, beside other benefits, to the occurrence of new key players in the field under the form of a specialized factoring institution to further contribute to the development of factoring market in Romania.

Notwithstanding the deficiencies generated by the lack of specific legislation, factoring offers certain benefits and advantages being a real trade finance alternative to the traditional financing solutions: easy access to short term financing (without the obligation to grant real guarantees), simplification of the international compensations as well as a decrease of transactions’ costs, insurance against the international transactions’ risks, increase sales in foreign markets by offering competitive terms of sale and protection against export credit losses, accelerate cash flow through faster collections, lower costs involved with Letters of Credit, liquidity to finance working capital.



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