Risks of factoring

• Credit default risk

One of the main risks of factoring is the risk of credit default of debtors. If the debtor fails to pay its debts, the factoring company may incur losses.

• Liquidity risk

If the liquidity needs are not correctly forecasted, the company may find itself in a predicament where the factoring company reduces the amount of funding.

• The risk of not being able to obtain financing

Some companies, especially small businesses, may find it difficult to obtain factoring financing due to their financial situation or risky accounts receivable base.

The limitations of factoring in New Zealand are

• Credit rating of debtors

Factoring companies may impose restrictions on debtors with poor credit ratings or unfavorable payment histories, which can limit a company’s access to factoring finance.

• Types of receivables

Certain types of receivables may be excluded from factoring transactions due to their complexity or high risk, such as receivables under long-term contracts.

• Contracts and obligations

Restrictions and covenants set forth in factoring contracts may limit a company’s freedom of action with respect to its accounts receivable.

Compliance with legislation

Factoring companies in New Zealand are required to comply with legislation that regulates financial services and customer protection. This includes the Financial Services Act, the Data Protection Act, and the Competition and Consumer Law. Compliance with the laws helps to minimize risk and ensure transparency and accountability in factoring activities.

Factoring is an important tool for managing receivables for companies in New Zealand. However, before applying factoring, companies should carefully assess the risks and limitations of this tool and ensure compliance with the laws of the country. With proper planning and legal compliance, factoring can be an effective means of improving the financial situation of companies in New Zealand.

The post Risks and Limitations of Factoring under New Zealand Law appeared first on InvoiceNZ.

Contracts in factoring

• Factoring Agreement

This is the basic contract between the factoring company and the client (the seller of the receivables). It defines the rights and obligations of each party, discount percentages, rates, fees, commissions and other important terms.

• Contract with receivables

This document is between the factoring company and the client’s debtors. It defines that the debtors are obliged to pay the debt directly to the factoring company, and also establishes the terms and conditions of payment.

• Representation Agreement

When the factoring company acts as the client’s representative, this document establishes the rights and authority of the factoring company to collect debts from debtors.

Documentation in factoring

• Invoices

This is the key document that confirms the client’s accounts receivable to the factoring company. Invoices must be accurate and meet the general requirements of correctness and completeness of documentation.

• Debt Documents

The factoring company usually requires the client to provide additional documents confirming the receivables, such as contracts, orders, delivery documents and other documents confirming the performance of services or delivery of goods.

Compliance with regulations and legislation

Compliance with regulations and legislation in factoring is integral to successful operations. In New Zealand, factoring companies are required to comply with laws and regulations governing financial services and data protection, including:

• The Financial Services Act

This sets out the licensing requirements for financial companies and protects the rights of customers.

• Data Protection Act

This law regulates the collection, storage and use of customers’ personal data, including factoring transactions.

• Competition and Consumer Law

It ensures fair and transparent operations of factoring companies and protects the rights of clients.

Contracts and documentation are integral to a successful factoring business in New Zealand. Getting contracts right and providing accurate documentation ensures transparency and trust between the parties to the transaction. It is also important to comply with regulations and legislation to ensure that factoring transactions are legal and efficient, contributing to the success of companies in New Zealand.

The post Contracts and Documentation in Factoring: Key Elements and Rule Compliance appeared first on InvoiceNZ.

How to make the director repay the debts of the company?

Parties to factoring. There are three parties involved in factoring:

• The client.
• Debtor.
• Financial agent.

A financial agent is a person who provides the client with services to support monetary claims. Sometimes a financial agent is called a factor – these are synonyms. Any commercial organization, including banks, may be a financial agent.

The client is a person who assigns monetary claims to the factor and pays for its services.

What is an agency agreement

Previously, factoring was understood as the purchase and sale of the right to demand payment for goods sold, services rendered or work performed. But such a definition was similar to another contract – assignment of a claim. Besides, it did not correspond to international practice, according to which factoring is always a complex of services.

Now factoring is a complex of services on repayment of debt, which the financial agent renders for assignment of this debt.

A set of such services is assembled like a sandwich. There is a basic element, a kind of sandwich bun: the client concedes monetary claims to the factor and pays for his services. There is a filling, which the parties choose: at least two services from the following list:

• Financing, including in the form of a loan or pre-payment.
• Settlement of the client’s claims against third parties.
• Realization of claims against debtors, such as demanding payment of a debt, receiving payments from debtors.
• Checking, controlling or collecting collateral, dealing with guarantors or insurance companies.

If desired, the parties can add “sprinkles and gravy” – additional services. For example, bookkeeping, processing of debtor registers, inventory of receivables, insurance, etc.

Differences from an assignment. Cession is simply an assignment of a claim. In a cession, the one who has the right to demand something transfers that right to another person. A cession agreement is often used to formalize the sale of debts.

Cession is a mandatory element of factoring: the client assigns monetary claims to the factor for services rendered. But factoring is not limited to cession. In addition, it includes elements of other contracts: loan, sale and purchase, provision of services.

MFI: what it is and how it works

In cession, both monetary and non-monetary claims can be assigned, for example, the right to take goods from the seller’s warehouse can be assigned. In factoring, on the other hand, only the assignment of claims to pay money is allowed.

Differences from forfeiting. Factoring is used for short-term financing. The average term of factoring is 90 days. It is risky to provide money for a long period of time: the debtor may not be able to pay his debt. To minimize this risk, sometimes another type of financing against assignment of monetary claim – forfeiting – is used.

How to conclude a contract for the provision of services

Forfeiting is most often used in foreign trade export transactions.

As in factoring, forfeiting has three parties:

• Creditor – one who has a monetary claim against the debtor.
• Debtor – one who is obliged to pay the debt.
• The forfeiter is the one who pays the creditor’s claim for the debtor.

But the transaction is structured differently. The debtor pays the creditor with a promissory note or issues a letter of credit in the creditor’s name. The forfait pays the creditor for the debtor, and in return, the creditor gives him the promissory note or re-issues a letter of credit in his name. The forfait may then wait until the due date or sell the promissory note or reissue the letter of credit to another holder without waiting for the due date.

What is a letter of credit

A bill of exchange and a letter of credit are unconditional obligations of a debtor to pay a certain person. The debtor is no longer owed by virtue of the fact that the creditor has rendered him some service, performed work or sold goods, but by virtue of the executed bill of exchange or letter of credit. The content and legality of the original contract between the creditor and the debtor should not concern the forfeiter.

In factoring, however, the factor must be convinced of the reality and economic feasibility of the debt sold to him. Therefore, in the framework of forfeiting, financing can be provided for a longer period of time – even for several years.

Sometimes forfeiting is considered a kind of factoring. But this is not the case, because forfeiting does not provide the creditor with debt recovery services.

The post Why you Need Factoring appeared first on InvoiceNZ.

Regulation of factoring in New Zealand

Factoring in New Zealand does not fall under separate specialized legislation. Instead, it is governed by various general laws and regulations, including:

1. Competition and Consumer Law Act

This Act regulates the interaction between companies and their customers. It protects the rights of customers by setting requirements for factoring companies to operate fairly and transparently.

2. Data Protection Law

Factoring companies have access to sensitive financial data of their clients. The Data Protection Act obliges companies to comply with appropriate measures to ensure the security and confidentiality of this data.

3. Corporate law

Factoring companies must comply with the general rules and regulations set out in corporate law that relate to the formation and registration of companies in New Zealand.

Obligations of factoring companies

Factoring companies in New Zealand must comply with the following obligations:

1. Licensing and registration

Factoring companies must be properly licensed and registered under the financial services legislation.

2. Transparency and documentation

Companies are obliged to provide clear and understandable information about their services, tariffs, commissions and work rules to clients. The execution of legally correct contracts and documents is mandatory.

3. Data protection and confidentiality

Factoring companies must ensure security and confidentiality of clients’ data in accordance with the data protection law.

Factoring legislation in New Zealand provides a legal framework to regulate this financial instrument and protect the interests of all participants. Factoring companies must comply with the obligations and requirements set out in the legislation to ensure transparency, accountability and trust in the factoring market in New Zealand. With proper compliance with all legal rules and regulations, factoring can be a powerful tool to promote the growth and success of companies in this country.

The post Factoring Legislation in New Zealand: Overview and Obligations appeared first on InvoiceNZ.

What is factoring?

Factoring is a financial transaction in which a company sells its outstanding invoices (accounts receivable) to a factoring company (the factor) at a discount. The factor provides term financing to the company by paying it a certain percentage of the total receivables. The factor then collects the money itself from the company’s debtors, thus giving the company instant access to money.

Legal aspects of factoring in New Zealand

Factoring legislation: Factoring in New Zealand is governed by various laws and acts. The lack of specialized factoring legislation makes it necessary to carefully research the applicable law and comply with all applicable rules and regulations.

Contracts and documentation: Drawing up contracts between the company and the factoring company is an integral part of the factoring transaction. Legally correct and complete contracts help avoid misunderstandings and disputes between the parties.

Data Protection: Factoring involves the exchange of sensitive information between the company, the factor and the debtors. Therefore, compliance with data protection laws is mandatory to protect the rights and interests of all parties involved.

Regulatory aspects of factoring in New Zealand

Factoring company licensing: Factoring companies must meet the requirements set by the regulators and obtain the appropriate license.

Financial Reporting: Factoring companies must comply with the rules of reporting and transparency of their activities to the regulatory authorities.

Protection of clients’ and debtors’ rights: Regulators ensure that factoring companies respect the rights and interests of clients and debtors to prevent abuse.

Factoring is a powerful tool to improve the financial situation of companies in New Zealand. However, legal and regulatory aspects must be carefully considered in order to successfully utilize this financial tool. Compliance with laws and regulations will help ensure that factoring transactions are transparent, responsible and sustainable, which will ultimately benefit both companies and factoring companies in New Zealand.

The post Factoring Basics in New Zealand: Legal and Regulatory Aspects appeared first on InvoiceNZ.