The sale of receivables is an effective means of releasing the liquidity tied up in them. In addition, the seller of the receivable (supplier of the goods or services) can, under certain conditions, eliminate the payment or delcredere risk of the debtor (buyer of the goods or services).
There are a number of instruments that have the purpose of selling receivables. Their specifics can be found in the Standard Definitions for Techniques of Supply Chain Finance published by the Global Supply Chain Finance Forum: GSCFF
Claims can be sold on a disclosed or undisclosed basis; the debtor is thus informed about the sale of the receivable or not. With Factoring, the debtor is usually informed that the receivable has been sold and that payment of the invoice amount is to be made to the factoring company when due. Another special feature of Factoring is the fact that the debtor’s payment risk is assumed by credit insurance. One- and two-contract models are used. In the one-contract model, the factoring company concludes a contract with the credit insurance company. In the two-contract model, the seller of the receivables is the policyholder and transfers his claims to the factoring company. Credit insurances do not usually insure 100 % of the amount of the receivable, therefore factoring companies deduct a certain percentage (approx. 15 %) from the purchase price. The seller of the receivable receives this security discount if the debtor pays the receivable in full when due.
Another special feature of factoring contracts is the obligation to offer any new receivable from a contractually specified debtor to the factoring company for purchase. If the sale of receivables is disclosed,
the debtor remits the invoice amount to the buyer of receivables directly. The pass-through risk of the seller of receivables is thus excluded. If the sale of receivables is undisclosed, the debtor first transfers the money to the seller of receivables. After receipt, the seller forwards the received amounts to the buyer of receivables.The latter must therefore assess whether the seller of receivables is able to transfer the received amount. In the case of insolvency of the seller of receivables, for example, this is not possible without further ado. The ability to forward payments on time falls under the so-called Servicer Risk. This also includes the ability/willingness of the seller to sell receivables free of encumbrances and defences. Finally, the risk of fraud (double assignments, sale of non-existent receivables) is subsumed under this.
When selling receivables, the transfer of the right to the receivable takes place through a separate assignment agreement. It must therefore always be checked whether receivables may be assigned in accordance with the applicable legal framework or whether certain regulations must be observed in the assignment (e.g. entry in a receivables register).
Especially in cross-border transactions, the examination of the different legal frameworks increases the complexity of debt purchase agreements.
Another fundamental feature is the possibility to take recourse to the seller of receivables. If the seller wants to eliminate the payment risk of the debtor, a without-recourse receivables purchase agreement is used. In this case, the buyer of receivables must ensure that the payment obligation is not dependent on the seller’s performance or any other condition. Certain payment instruments (e.g. bills of exchange) create independent payment obligations that cannot be challenged on the basis of differences between the parties of the underlying supply contract.
In contrast, when receivables are purchased on a with-recourse basis, the buyer of receivables has a right of recourse. Thus, the risk of the seller of receivables gains in importance. However, not to the same extent as, for example, in case of another source of liquidity, a working capital facility. This is because, in contrast to a loan agreement where the borrower owes repayment plus interest on the loan, the buyer of receivables only demands repayment of the purchase price of the receivable if the original debtor of the receivable fails to make payment. This is referred to as a secondary credit risk. In connection with special credit agreements (borrowing base facilities), receivables can be used as collateral. Legally, there is a fundamental difference: in the case of a receivable purchase transaction, the buyer acquires a receivable on the basis of the underlying supply contract. If, on the other hand, a receivable serves as collateral, the credit agreement is the basis for the claim. Especially in debt restructuring scenarios and/or allocation of foreign currency reserves, this is a decisive criterion for the ranking of the satisfaction of claims.
There are a number of instruments that have the purpose of selling receivables. Their specifics can be found in the Standard Definitions for Techniques of Supply Chain Finance published by the Global Supply Chain Finance Forum: GSCFF
Claims can be sold on a disclosed or undisclosed basis; the debtor is thus informed about the sale of the receivable or not. With Factoring, the debtor is usually informed that the receivable has been sold and that payment of the invoice amount is to be made to the factoring company when due. Another special feature of Factoring is the fact that the debtor’s payment risk is assumed by credit insurance. One- and two-contract models are used. In the one-contract model, the factoring company concludes a contract with the credit insurance company. In the two-contract model, the seller of the receivables is the policyholder and transfers his claims to the factoring company. Credit insurances do not usually insure 100 % of the amount of the receivable, therefore factoring companies deduct a certain percentage (approx. 15 %) from the purchase price. The seller of the receivable receives this security discount if the debtor pays the receivable in full when due.
Another special feature of factoring contracts is the obligation to offer any new receivable from a contractually specified debtor to the factoring company for purchase. If the sale of receivables is disclosed,
the debtor remits the invoice amount to the buyer of receivables directly. The pass-through risk of the seller of receivables is thus excluded. If the sale of receivables is undisclosed, the debtor first transfers the money to the seller of receivables. After receipt, the seller forwards the received amounts to the buyer of receivables.The latter must therefore assess whether the seller of receivables is able to transfer the received amount. In the case of insolvency of the seller of receivables, for example, this is not possible without further ado. The ability to forward payments on time falls under the so-called Servicer Risk. This also includes the ability/willingness of the seller to sell receivables free of encumbrances and defences. Finally, the risk of fraud (double assignments, sale of non-existent receivables) is subsumed under this.
When selling receivables, the transfer of the right to the receivable takes place through a separate assignment agreement. It must therefore always be checked whether receivables may be assigned in accordance with the applicable legal framework or whether certain regulations must be observed in the assignment (e.g. entry in a receivables register).
Especially in cross-border transactions, the examination of the different legal frameworks increases the complexity of debt purchase agreements.
Another fundamental feature is the possibility to take recourse to the seller of receivables. If the seller wants to eliminate the payment risk of the debtor, a without-recourse receivables purchase agreement is used. In this case, the buyer of receivables must ensure that the payment obligation is not dependent on the seller’s performance or any other condition. Certain payment instruments (e.g. bills of exchange) create independent payment obligations that cannot be challenged on the basis of differences between the parties of the underlying supply contract.
In contrast, when receivables are purchased on a with-recourse basis, the buyer of receivables has a right of recourse. Thus, the risk of the seller of receivables gains in importance. However, not to the same extent as, for example, in case of another source of liquidity, a working capital facility. This is because, in contrast to a loan agreement where the borrower owes repayment plus interest on the loan, the buyer of receivables only demands repayment of the purchase price of the receivable if the original debtor of the receivable fails to make payment. This is referred to as a secondary credit risk. In connection with special credit agreements (borrowing base facilities), receivables can be used as collateral. Legally, there is a fundamental difference: in the case of a receivable purchase transaction, the buyer acquires a receivable on the basis of the underlying supply contract. If, on the other hand, a receivable serves as collateral, the credit agreement is the basis for the claim. Especially in debt restructuring scenarios and/or allocation of foreign currency reserves, this is a decisive criterion for the ranking of the satisfaction of claims.
