Factoring Law
Factoring law goes back to English Common Law and probably even to times before that. Laws regarding factoring account receivables protect both the business selling its invoices and the factoring firm that is purchasing them at discount. The most basic laws govern the abilities of factoring firms in seeking re-payment and the terms of contractual obligations.
The most important law goes back to an English Act of Parliament in the 1600s when the government created limitations on what factors can do in seeking repayment because many began to overstep their boundaries and possessing a business’ property in return for financing. Today, factoring firms are limited to simply buying invoices at a discount without ever taking possession of a business’ property or assets.
Other laws refer to the obligation to notify a customer that their debt has been sold. Though these laws differ from region to region, most regions do not require this practice but most factoring firms will notify the customers of the transaction and also handle the collections process.
At the end of the day, some businesses are put off by factoring because of its perceived complexity and risk. Actually, the process is fairly straightforward and regulated just like any financial transaction. A business receives an immediate injection of cash flow in return for their invoices. In return for giving cash up front, the factoring firm collects the unpaid invoices at a discounted price and the cost of additional fees. The factoring firm will also usually take on the responsibility of collections and record keeping.
There are basic protections in the financial system to protect all parties but otherwise, many factoring firms may have very different contracts. For the most part, the variables are the factoring price, the price of various included fees, the terms of invoice repayment, and which services the factoring firm will provide (i.e. collections).