10 Legal aspects of factoring

The growth of a company depends largely on its liquidity. Many business projects, sales and credit expansion are hindered by lack of immediate cash. Today, the companies which are increasingly exporting face the risk of insolvency of its customers in addition to affecting the margin of the company. This weakens the results and becomes a permanent menace in achieving financial balance. So finding different financial variants is necessary which includes factoring.

Factoring in its traditional conception includes the management and collection of loans granted by the client and accepted by the factor, which assumes according to the contract the risk of insolvency of debtors. However there are certain legal aspects of factoring which you need to be aware of before you consider it as another financial variant.

The following are the legal aspects of factoring:

1. The sale is taking place on a credit basis and the factor takes the responsibility for collecting payment from the buyer. For this purpose, the agreement between the seller and the factor should clearly state the role of each party involved in the sale.

2. The seller should give due authority to the factor for collecting money from the buyer.

3. Legally, the claim on the buyer is assigned by the seller to the factor. For this, a letter of authority is given by the seller to the factor.

4. The buyer is also informed by the seller that he should make payment only to the factor.

5. All the rights of the seller on the buyer now get transferred to the factor in his capacity as an assignee.

6. In case of default by the buyer, it is the factor who will take action against the buyer in his capacity as an assignee.

7. No other creditor can have any claim settled with the buyer towards the sale of goods except the factor.

8. The banker will be informed that he should not finance the seller for any post sales requirements or accounts receivable discount, as it is the factor who has been assigned with the bills.

9. Disputes arising between the seller and buyer should be settled by the parties concerned and they should not affect the factor.

10. The factor must have the right to take legal action against the buyer in the case of default.