Companies operating in Romania are increasingly interested in factoring. According to open data, in the first half of 2022, the value of factoring operations amounted to EUR 3.68 billion, which is 31.6% more than in the same period last year. And while a certain part of this growth is undoubtedly related to inflation, there is no denying the growing appetite of companies for this type of financial product.

When companies choose factoring?

Generally, companies look for supply chain financing options either when they face liquidity shortages (short payment terms agreed with suppliers combined with (longer) agreed terms with customers) or when they plan to expand their production/delivery capacity to meet growing demand for the offered product/service. In some cases, both scenarios apply. In principle, in any of these situations, the goal is also to free internal resources from the burden of administration and collection of invoiced amounts.

In practice, some companies may turn to factoring at a later stage, after they have already tested other credit products for liquidity needs (working capital lines, loan bases, etc.) and after they have created equity guarantees in favor of the relevant primary lenders. Sometimes these companies are quite satisfied with the products they already use and do not necessarily want to abandon them, but simply add factoring to their existing range.

Practical problems and potential solutions

According to the current legal provisions, conflicting situations can be foreseen between the main guarantees of shares established by the company in favor of the original creditors and the legitimate expectation of the factoring service provider that the accounts/receivables purchased from this company are free assignments.

The Civil Code stipulates that goods sold by a company in the course of its ordinary activities are transferred to buyers without encumbrances. Simply put, if a bank holds a security interest in the stock of goods sold in this way, it will no longer be able to trace the object of the security interest in the hands of the buyer. In lieu of this right of recourse, the bank’s lien will be assigned to the claim or amount charged to the buyer. The mortgagor (the company that sells the relevant goods) will be obliged, in turn, to deposit the corresponding sums into a special account and inform the bank about it.

In this context, problems can arise when a company intends to assign its trade receivables to a factoring service provider. A reasonable expectation of a factoring service provider would be to purchase invoices/receivables free of any other encumbrances, but this is not the case (after the security is transferred, the bank retains a first-class lien on said receivables/invoices/amounts).

One way to unblock the situation would be to start negotiations with both financial institutions with the aim of trying to distribute the guarantees between them, respectively, limit the real guarantee of the bank to certain types of shares, freeing other types from any burden to facilitate factoring operations.

There are other, more complex options that require a greater appetite for negotiations on the part of the two financial institutions. One requires both creditors to agree that the original creditor’s security will no longer be transferred to the receivables/invoices issued to the buyer (thereby remaining free of encumbrances). However, the sums collected by the factoring company from the factoring service provider will be placed in a bank account on which the original creditor will have a first lien, while the factoring beneficiary will retain the right to manage the account.

conclusions

The above is a simple example of how flexibility can be maintained in the provision of guarantees without neglecting the legitimate interests of creditors. In general, there are legislative solutions to facilitate companies’ access to factoring products in addition to other financial products designed to increase liquidity and/or support companies’ development plans.

The article is signed by Adina Damashin, advisor, lawyer specializing in financial and banking law Schoenherr and Asociati SCA