What is a factoring agreement?
Factoring is a financial arrangement whereby a company assigns the invoices generated by its sales to a bank, which then takes responsibility for collecting payment.
Types of factoring agreement
Non-recourse factoring relieves the company of liability for the client's insolvency — in other words, it protects the company (which assigns the debt to the bank) against the risk that its debtor-client becomes insolvent.
By contrast, in recourse factoring, if the bank is unable to collect payment, it returns the invoices to the assigning company and recovers the amount it advanced — meaning it can pursue the company in the event of non-payment.
How a factoring agreement works
There is no specific statutory framework governing these agreements. They are regulated by the provisions of the Spanish Commercial Code and the Spanish Civil Code on the assignment of receivables, as well as by the Third Additional Provision of Law 1/1999 of 5 January, regulating Venture Capital Entities and their management companies. The general rule provides that the company is not liable for the debtor's solvency, unless expressly agreed otherwise or the insolvency predated the assignment and was publicly known.
In particular, Article 1529 of the Spanish Civil Code states that a good-faith seller (the assigning company) is not liable for the debtor's solvency unless this has been expressly stipulated, or unless the insolvency predated the assignment and was publicly known. Accordingly, an agreement may contain no express liability clause, in which case the client would bear no responsibility for the debtor's solvency — though the contractually agreed definition of insolvency would still need to be respected.
On the other hand, the documentation with the bank may refer to "notorious insolvency" or a different concept from "insolvency that predated the assignment and was publicly known", which is the standard set out in the Spanish Commercial Code.
Example of a factoring agreement
By way of illustration, it is possible that under the agreement with the bank, the client assigns to the bank its receivables from company X (the client's own customer) up to an overall limit of, for example, €500,000.
That contract may stipulate that:
- The Bank may manage debt collection, guarantee against insolvency, and make advances.
- For the bank to advance receivables, those receivables do not need to have matured. In addition, they must be notified to the Bank within thirty days of the date on which the receivable arose.
- Factoring may be without appeal, for example, but the bank's assumption of risk is conditional on the insolvency meeting the definition agreed in the contract, which may establish conditions such as:
- the maturity date of the assigned receivables must fall after the insolvency event — which will be determined by the insolvency declaration order, the date of a restructuring plan, the enforcement or distraint order, or an agreement between the Bank and the client that the receivable is uncollectable.
- The cause of non-payment must be insolvency. If the debtor fails to pay for a reason other than insolvency and the bank has already advanced the amount to the client, the bank will cancel the financing.
- Outside the scenarios described above, it is considered that no insolvency exists and, therefore, the bank does not cover the non-payment.
