Factoring

What is Factoring?

Factoring is the transfer of term receivables of sales of service and goods to a factor by means of assignment and the management of these receivables by the factor. This factoring transaction is realized between the factor, debtor (buyers) and a commercial company selling goods or providing services (seller). Factoring basically provides three services; Financing, Guarantee ve Collection

Factoring Services

Factoring assumes the risk of non-payment of services offered and trade receivables due to financial reasons, follows collection process, converts receivables into cash prior to maturity. Thus, companies ensure regular cash flow with the sources obtained from factoring without the need for other resources.

Factoring provides three main services; Financing, Guarantee and Collection. These services covered by Factoring, can be offered in combination or separately based on the needs of the enterprises.

Receivable guarantee: The factoring company assumes the risk of non- payment of purchasing companies due to financial reasons. It takes under guarantee 100% of the receivables’ approved limit within the term sales of the seller, reduces the trade risk of enterprises.

Collection: Receivables transferred by sellers, become the receivables of the factor. The factor follows the collection procedures. Companies transferring the follow up of collection to factors, gain the opportunity of sustainable and safe growth.

Financing: Sellers transferring term receivables to the factor, may use a certain percentage of this receivable prior to maturity as pre-payment. Thus, conversion of receivables into cash gathers speed and occasionally the cash required for growth of business is obtained from trade receivables without the necessity for any other external source. Factoring provides working capital "in parallel to sales" and increases the purchasing power of firms.

Domestic Factoring

These are the factoring transactions realized in that the customer (seller), debtor and factor are in the same country.

The seller willing to takes advantage of the factoring service, contacts the factor and submits the relevant information and documents.

After examining, the factor makes its proposal which includes the offered services, the commission fee and other charges to the seller.

Factoring agreement is signed between the factor and the seller.

The customer informs the factor in written about the receivables realized/ unrealized sale of goods and services. It sends one of the copy of the invoice/ the document certifying the receivable to the factor.

The customer is obliged to duly assign and deliver to the factor the notification of receivables and the documents certifying the receivable together with the means of payment(check, bill of exchange etc.). If necessary, the factor may request additional information and documents from the customer.

Upon request of the customer, pre-payment can be made by the factor within the framework of the factoring agreement.

The factor may call back the prepayment with its charges (interest, fees, commission) or the customer may make the payment before to due date.

Collection of receivables subject to assignment may be realized as follows:

The receivable can be paid by the debtor to the factor with bank transfer or by other means of payment (check, notes, policy etc.) at maturity.

In exceptional cases, payment can be made by the customer to the factor.

Factoring interest, commission fee and other charges can be collected from the customer and/or debtor in accordance with the factoring agreement.

Following the collection of receivables and according to the factoring agreement with the customer, the factor pay the balance to the customer after deducting the debts of the customer.

International Factoring

These are the factoring transactions realized in that the customer (seller) and debtor (buyer)are in the different countries. The factor provides international factoring transactions generally by using an extensive correspondent network channel for guarantee and collection services (two- factoring system), and can also undertake these services itself where necessary.

Two factoring (factor) system

Export

The seller provides information about the foreign purchaser to whom he wishes to sell goods, to the factor for determination of credibility.

The factor sends these information to the correspondent factor abroad and asks for limit of the buyers.

Upon approval of the limit, the customer is informed by a Letter of Limit ApprovalNotification about the guarantee limit identified for each customer and undertakes the payment risks of the buyers within the guarantee framework provided by the correspondent.

The seller submits to the factor the reiated invoices of the goods that are to be sent the purchaser attached to the Notification of Transfer of Receivables (NTR) and also the loading documents certifying the actual export of the goods (Customs Declaration, bill of lading, order form etc.).

The factor may finance the seller at a certain percentage of the invoice amount as pre-payment in the foreign currency of these receivables.

The buyer pays the invoice amount subject to the assignment at the maturity to the correspondent and the correspondent transfers this amount to the factor.

Following the collection of receivables and according to the factoring agreement with the customer, the factor pay the balance to the customer after deducting the debts of the customer. When there is factoring guarantee, any receivables which cannot be collected due to the buyer's financial difficulties, are paid by the correspondent(import factor) to the export factor within the framework of rules of international factoring and then is paid by the factor to the seller in accordance with the provisions of the factoring agreement.

Import

In import factoring business, the factoring request for the importer is sent to the factor by the export factor. It is both possible to approve guarantee limits to export factor on behalf of exporters as well as providing only collection services.

For transactions at which guarantee is provided; the factor analyses the credit risk of the import company and notifies the correspondent about the limit approval.

For transactions at which collection services are to be provided, the factor notifies the assignment to the importer and follows-up duly payment of the receivables.

The factor pays the collected receivables to the accounts of the correspondent factor.

One Factor System

These are international factoring transactions without correspondents. The factor undertakes guarantee and/ or collection and/ or financing services by itself.

Seller's competitiveness increases, affords opportunity to enter new markets.

Receivables are managed by expert organizations.

Provides regular cash flow.

Affords alternative sources.

Credit value increases.

Provides time and cost savings.

In case of international factoring transactions, in addition to above benefits;

100% collection guarantee provides the opportunity to open to new markets.

Through correspondents, the international sales’ receivables are followed and payment at maturity is provided.

The exporter will not have to experience problems arising from the fact of not knowing the language and laws of the country to which export is carried out.

He is informed about the financial status of the buyer in short time and will get the opportunity of secure sale.

Since the international guarantee limit provided by the factor on behalf of the importer will not create any costs for the importer, it also helps the customers to avoid costly operations like letter of credits, payment against documents etc.

The history of factoring concept is based on Mesopotamia. The Hammurabi Laws contain explanations about transfer of receivables. More systematic applications can be seen as of the beginning of ancient Rome. Agents/ factors took part in the management of trade of producer's or trader's goods. The use of factoring progressed increasingly in the Middle Age.

After the 16th century during colonization of European countries, those exporting their consumer goods from their homeland needed the help of these agents to increase their trade volume. The first common and documented use of factoring started in the time of colonies in the USA.

Modern factoring applications started in the 1950's. The simplicity and the confidentiality of the process was the reason why companies wanting to create additional funding preferred this transaction. Although factoring companies had not the equivalent level of security, they did not consider this during the transactions and as a result, many factors, suffered serious financial losses from the bankruptcy of major sellers. Furthermore, deductions made by buyers from returned goods or their receivables without prior notice left the factors, which had no protection against such problems in a difficult situation. Later, this experience merged with the American model and in the 1960's the method of undertaking receivables based on total turnover was encouraged. In these applications, transactions were always notified to the buyer within the period with or without recourse. The funder, made collection from the buyer. This basically is the beginning of modern factoring applications.

The main instrument in Southeast and East Asia for payment guarantee and funding, was letter of credit until the beginning of the 1980's. However, during the development process of factoring in the USA, especially together with the communication and transportation revolution, it emerged that the letter of credit is no longer appropriate. With increasing demands created by competitions, buyers refrained from engaging in fund commitments for products that they did not take over or examine. In the course of this situation, it also became valid for Asian Pacific exporters who wanted to develop their trade volume with European and American buyers; therefore, the development of factoring in this region followed a parallel path to the increase in international transactions. However FCI (Factors Chain International) statistics showed that domestic factoring is rapidly increasing in this region.

This funding instrument which gained large development since the 1960's when it gained the concept of modern factoring until today, and with important contributions of organizations such as the FCI, they became an indispensable part of trade.

Factoring, which at the beginning was accepted as l last funding resources, generally was first adopted in Europe as an indispensable funding technique with the help of the services provided and then also was adopted by Turkish business men, and it was seen that factoring in short term receivables funding was a useful method for enterprises. Being implemented in Turkey since 1980, as a necessity of acceleration of opening the world economy and the entry of foreign fund, banks have started to make initiatives to provide new financial services to companies within the framework of emerging needs. These conditions ensured a suitable environment for factoring in Turkey.

Banks have started factoring services in their departments in 1988, and in 1994 the Decree Law No. 545 regarding loan was put into practice. Following these arrangements, the Factoring Association was founded.

In the regulation published in 2006, the control and management was transferred to BRSA and financial leasing, factoring and finance companies' founding and activity principles were determined.

The Factoring Law draft which was first submitted to the Parliament in 2009, was temporarily taken into the archive in 2011, and was taken again on the agenda of the Parliament in April, 2012 and entered into force in December 2012, as intervening to the Leasing, Factoring and Financing Companies Law No. 6361. In 2013, the Factoring Association abolished itself and was listed to the Association of Financial Institutions was founded with the Law number 6361.

1) What is the definition and history of Factoring?

Factoring is a financial instrument offering guarantee, collection/ receivable management and funding (pre- payment) services to the vendors by being assigned receivables arising from sales of goods or services.

Parties in factoring;

FACTORING: Institution providing factoring services.

CUSTOMER: Party benefitting from factoring services (vendor).

DEBTOR: Debtor of the receivable subject to assignment (buyer) In order to be able to provide factoring services, a factoring contract must be signed between the factoring and customer.

The roots of factoring are based 4000 years ago on the period of the Mesopotamian King Hammurabi.

In fact, in the historical development process, all civilizations caring about trade, including the Romans who made the first bill discounting transaction, used easy forms of factoring. Factoring with today's form and function started to be applied in the 1960's. The first factoring company was also founded in this period in Europe.

2) What are Factoring Services?

Transaction of Business (As collection, management of receivables): Keeping Records and receivables accounts, follow up of collection. Collection services, are restricted with payments actually made by the debtor with his own will, and the factoring services have no obligation to follow assigned receivables via judgment or execution, to make notification to the debtor, or to make declarations like statements.

Financing (pre-payment): According to the needs of the customer, pre-payment can be made by the factoring company within the framework of the factoring agreement without waiting for the term of the receivables to be assigned by the customer. (Provision of Funding)

Guarantee: Means the debtor's non-payment risk undertaken by the factoring within the framework of the provisions of the factoring contract.

3) Do I have to benefit from all the services consisting of Funding provided by factoring, guarantee and business transactions (collection)?

No, you can receive all 3 services together or can benefit from each service separately.

4) What are the types of factoring?

*Full Service Factoring: This is the traditional factoring type which is used most commonly. With a continuous agreement between the vendor and the factoring company, the factoring, accepts to assign all receivables certified with invoices and similar documents arising from normal commercial relations, to collect receivables, to keep records of receivables and to make pre- payment. These kind of factoring services, are divided into two groups depending on the fact whether or not the risk of non-collection of receivables is undertaken by the factoring company.

a) Revocable Factoring: These are transactions in which the factoring company does not assume the nonpayment risk of the debtor.

b) irrevocably factoring: These are transactions in which factoring companies take the risk of non- payment of the debtor within the framework of the factoring contract provisions. Any situations of dispute to arise of the relation between the debtor (buyer) and customer (vendor) or any other reasons, are not covered by the guarantee..

*Wholesale Factoring: This is a factoring type used in relation to low- valued and many receivables. This kind of factoring in which financing transactions are in the forefront, is he transaction in which the vendor assigns all sales - with other words- its turnover to the factoring in whole. The difference to full service factoring is that the sales records are not kept by the factoring and that there is no guarantee against the risk of non- payment of the debt. Furthermore, although notification is made on the invoice to the debtor to make payment to the factoring, the vendor is responsible as an agent of the factoring company for the collection of receivables.

*Maturity Factoring: This is a factoring type not including pre- payment. The basis of these agreements are the services of the collection of receivables and keeping sales records. In case that the parties come to an agreement, it also can be included in these kinds of factoring transactions that the factoring company undertakes the risk of non- payment of the debt.

The factoring pays to the vendor the receivable rights in the agreed period after the invoice date.

*Pre-notified factoring: This is the type of factoring where the assignment of receivables is notified to the debtor.

*Factoring without notice: This is the type of factoring where the assignment of the receivable by the factoring company is not notified to the debtor. The customer 8vendor) makes collection from the debtor and makes payment to the factoring. (The rights of assignment, notification and collection of the factoring remain hidden.)

*Receivables Discount: This is the type of factoring where generally only financing services are provided. This is an approach generally applied to companies which need financing but do not need the management of receivables or protection against non- payment of debts. In this case, it may not be notified to the debtor that the receivable was assigned to the factoring company, the collection of receivables assigned to the factoring by the vendor is again performed by the vendor on behalf of the factoring.

As it can be understood from these explanations, the different types of factoring are created by using the factoring transactions separately or together in combination. It is essential not to come to a conclusion that a transaction is no factoring transaction only through wrong interpretation in situations where some parts of the transactions are not used. All above named factoring types are accepted as factoring transactions on the world and are applied accordingly.

5) What is the assignment of receivables that arises?

In the Obligation Law, the assignment of receivables existing at assignment or to arise after assignment can only be made given that it can be determined. The reason for the necessity to be able to determine this assignment is to put into fore without any doubt, which of the arising receivables are to be covered by the assignment.

In order to be able to assign receivables in sales of goods or services according to relevant BRSA legislation ;

A contract is made for the assignment of the receivable to arise between the factoring company and the customer. In case that this contract includes the definition of the job, the nature of the receivable, the amount or the calculation of the amount, the factoring limit defined within the framework of data on which the calculation is to be based and the payment conditions must be clearly identified.

These issues in the relevant contract must be certified with a contract to be signed between the customer of the factoring company and the debtor, the order form, Proforma invoice and/ or letter of credit, and other documents showing the receivable to arise- if available.

Invoice or documents similar to invoices to be issued after occurrence of receivables, must be sent by the customer to the factoring company in shortest time and must be added to the transaction file.

6) What are the fees to be collected from factoring transactions?

COMMISSION: The fees received from the factoring for the services provided to the customer.

FACTORING FEE (INTEREST): The interest amount which the factoring receives against the pre-payment given.

COSTS: The price the factoring receives except from factoring fees and commissions (mail, wire transfer, EFT etc.).

Banking Insurance: The income like commission, fees and costs received against factoring services are subject to Banking Insurance. Only factoring fees, commissions and costs from transactions providing foreign exchange for Turkey are exempted from Banking Insurance.

7) What is the legal nature of factoring contracts?

The factoring contract is an atypical contract with mixed content and may contain a variety of elements. More weight is given to certain elements according to the type, or maybe the element may not be included at all under consideration of the function it includes.

Within the framework of generally accepted and established factoring applications, pre-payment (funding), collection of receivables and management of receivable related accounts (business transaction) and guarantee elements come into force.

Factoring companies, have the possibility to define all of these elements as they wish and in the scope they want in the factoring contract which is signed in the nature of a framework contract with the customer.

In summary, considering the activity functions of factoring; factoring contracts generate a mixed content as they content the assignment of receivables, financing (prepayment, credit), proxy, service and guarantee elements, and the nature of a continuous debt relations since the performances of the parties are spread on a certain time.

Legislation relating to such contracts are applied in fields according to the content which are determined in factoring contracts.

8) Can you provide information about factoring chains on the world?

Today, we can talk about two international organizations. According to the order of size;

1. FCI (Factors Chain International)
2. IFG (International Factors Group)

These chains are operating with their own set of bylaw or regulations. The rules of all Chains' organizations are basically similar. Many factoring companies from different countries are members of these organizations. The factoring company being member of the organization accepts the rules of this organization. For factoring companies making or wishing to make international factoring transactions these countries provide significant advantages. However, factoring companies not being member of an organization, also can realize international factoring transactions. For this it must realize correspondent relations and bilateral agreements with the countries in which it wants to be active.

9) Who can benefit from factoring services?

All enterprises making domestic and international trade, terms sales, can benefit from factoring services. There is no limitation of any balance sheet size or turnover criteria.

10) Does the factoring company undertake customs clearance in import factoring transactions?

No, all documents are issued on your name and you draw the goods from customs.

11) What kind of document does the exporter sign in export factoring transactions?

The exporting company signs a contract including information on payment instructions and deeds of assignment.

13) Do I have to include all my buyers I am making export to, into the factoring system?

No. You can add the buyers to the system according to your own risk assessment, and exclude those you do not want to have in the system.

14) Can we increase the term which we will provide to our buyers through factoring?

Since you are able to get a certain percentage of the invoice amount with factoring application immediately, you will have the opportunity to provide term payment to the buyers without experiencing cash shortage arising from term payment.

15) Will a factor entering between our buyers and our company lead to any problem?

In the factoring method, collecting your receivables and providing you the financing you need, this is sourced by the commercial agreement between you and your buyers, and it is followed in accordance with these working conditions. Therefore, there will be no problem between you and your buyer.

16) Does factoring increase transaction bureaucracy?

No. In your domestic and overseas sales, it will be sufficient to previously notify once the company you are making factoring with ands stick an assignment note on the invoices. For sales against cheque it even will not be required to notify your customer.

17) How will legal follow- up process be made if a receivable subject to factoring is not paid by the debtor?

This issue depends on the agreement between the customer and factoring. Proceedings can be made both by the customer as well as the factoring company given that costs are met by the customer.

18) Do I have to transfer all of my termed receivables in order to take advantage from factoring transactions?

No, even if in fact it is more appropriate to assign factoring receivables in wholesale and in advance, this is not an obligation.

19) how can I make subject receivables from customers with whom I work with open account?

Receivables from Open account (where payment of the fee by bank transfer and receive) companies may be subject to factoring transactions. Invoices are sent to the borrower, on which a note is placed notifying the debtor that receivables from this invoice was assigned to the factoring and that the amount has to be paid to the account of the factoring.

20) What means Revocable Factoring irrevocably factoring?

Revocable factoring, is the type of factoring in which the factoring company does not assume the risk of non-payment of receivables and in this model, financing and collection service is provided. In case of non-payment of receivables, the factoring company's right to recourse to the vendor and to ask back the pre-payment remains hidden.

Irrevocably factoring is the type in which the factoring company undertakes the risk of non-payment of the receivables within the framework of limits and conditions identified at the beginning.

21) Will the guarantee become void in case of reclamation about goods subject to invoiced receivable (defective goods)?

The main reason for removal of guarantee is the fact that the goods are defective or a that it was sent a different good as requested from the buyer. Additionally, it is also required to fulfill limit allocation conditions, to comply with international factoring rules, and compliance with the contract or order conditions agreed with the purchaser in order to ensure the validity of the guarantee.

22) What should be the term of receivables?

Advance sales are not subject to factoring, factoring transactions in general can be made for take up to receivables with 120 days maturity, but the working conditions for the longer term can be evaluated by factoring companies.

23) Which receivables are not suitable for factoring ?

Receivables not based on invoices or similar documents are not suitable for factoring transactions. At the same time, in general, capital goods, perishable products and receivables arising from intra-group sales are not preferred in factoring.

24) What is the prepayment rate in factoring transactions?

The prepayment rate, is the rate expressing the amount to be given the customer as financing which is determined based on the term of assigned receivables, trading volume and the creditworthiness of receivables.

25) Is it possible to work with more than one factoring company for the same buyer in export factoring transactions?

No. All export transactions to a buyer must be realized through one factoring company. Splitting of an export which is to be made to the same buyer and to factor it through different factoring companies is against international factoring rules . If such a transaction should be made, not only the rights from this receivables will be lost, but also the creditworthiness of the exporter in the eyes of the factoring company will be reduced.

26) When starting with export factoring, is it necessary that all exports to a buyer undergo export factoring?

Yes. all exports to a buyer subject to factoring transactions must be made through the factoring company. In case that the existing limit is cancelled by the import factor or that cancellation of limit is requested by the exporter, the invoices must be sent to the factoring until the risk of the correspondent is reset. This is required according to international factoring rules and is a binding rule for all factoring companies who are member of the FCI (Factors Chain International) or IFG (International Factors Group).

27) What kind of sales are included in export factoring?

All forward sales and sales that are made in cash against goods fall within the scope of export factoring. Sales made against documents, transactions with letter of credit and cash sales shall not be made subject to 2F export factoring. Among letter of credit transactions, export factoring applications can only be applied to standby letter of credit types.

28) May natural persons make factoring?

Natural person merchants can benefit from factoring.

29) Do I need to issue an invoice to be able to benefit from factoring transactions?

The legislation foresees that receivables to be subjected to factoring must be based on invoice or similar documents. This means that an invoice is basic element.

However, receivables for which it is legally and technically not possible to issue an invoice, but can be certified with other documents can be subjected to factoring.

30) Is there a difference between factoring and bank loans?

There are differences between factoring and bank loans in terms of accounting techniques. While bank loans are included in the financial liabilities item, the factoring debts are included in the vendors item. In case that the factoring transaction is irrevocably the transaction may be completely left out of the balance sheet. This leads to positive results in the companies' balance sheets.

31) Which receivables cannot be assigned?

Sales in relation to buyers with assignment restrictions, if there is bilateral trade with the debtor company and in transactions where there is a partnership with the company to which sales is made, assignment cannot be realized.

32) What are the advantages of factoring finance services when compared to commercial loan products of banks?

Bank Loan

Seller's credibility is essential.

Causes an increase in the balance sheet liabilities.

Factoring Financing

The seller and / or buyer credibility is checked.

Since it provides that term receivables in the balance sheet are turned into cash, it increases the receivable turnover .

Especially in open account receivables and cash against goods the formation of doubtful receivables can be prevented with Factoring Guarantee Services.

33) Is it possible to benefit from factoring in the absence of the need of financing?

Yes it is possible. The financing function- together with the service and guaranty functions of factoring is only one of three functions. It is possible to make benefit from collection and or guarantee functions without making use of the financing function.

34) Will the importer be informed in the export factoring transactions?

Your importer may not be informed during the intelligence stage. However, when you want to receive export factoring services, it will be requested from you to send your importer a letter stating that you are benefitting from factoring services and accordingly he will be informed about this situation.

According to the mode of operation that will be selected, the importer may be notified. If the transaction to be made is notified factoring transaction, your importing company overseas will be notified and it will be added a note on the invoice that the receivable is assigned. (This is the main operation (notified transaction) in 2F export transactions.)

If the type of operation is non- notified factoring, the importing company will not be notified from the transaction. However in case of nonpayment on maturity, the factoring will notify the importing company that the receivables have been assigned.

35) What must be done to found a Factoring company?

Establishment and operating principles of factoring companies are determined by the arrangement with the Act No. 6361 about Leasing, Factoring and Financing Companies.

Article 6 of the relevant laws describes establishment and Article 7 the operating principles.

36) Are Factoring companies subject to any inspection sturdy?

Factoring transactions since 2006, are organized by the Banking Regulation and Supervision Agency (BRSA) and supervised by the BRSA.

Yet in accordance with the Turkish Lira Protection and Terrorism Financing Prevention Measures in compliance with the rules of Financial Crimes Investigation Board (MASAK)they are also subject to audit by the Financial Crimes Investigation Board.

37) Where can I find statistical information about the factoring industry?

You can find statistical data reports related to the factoring industry on the website of our Association and the Banking Regulation and Supervision Agency (BRSA), www.bddk.org.tr

38) Is FKB membership mandatory?

According to the Leasing, Factoring and Financing Companies Act No 6361, companies are obliged to become a member of the Union within 1 (one) month as of receiving the operation permit.

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