Factoring Agreement South Africa
Cash: a commodity that is becoming increasingly scarce in today`s economy. As consumers and businesses "tighten their belts," more and more small and medium-sized businesses find themselves looking for their debtors to ensure sustainable cash flows – often to no avail. The Banking Association`s Debtor Financing Committee believes it`s time to dispel the misconceptions that continue to surround full factoring – and for companies to use it as the powerful financial instrument that it is. Before you make a comparison, you may need a brief summary of how factoring works in general. Gone are the days when factoring houses were "lenders of last resort." Since different types of factoring are increasingly being used by larger, more established companies as a way to maintain cash flow and increase growth, small and medium-sized businesses would do well to explore this extremely powerful alternative form of financing. Many will be surprised to discover that full factoring in particular is not synonymous with loss of control over one`s own customer accounts and that disclosure should not have a negative impact on business partners. According to Factors Chain International (FCI), the global factoring volume for 2018 was €2.4 billion. In South Africa, factored sales amount to more than R25 billion per year. Companies that qualify for our factoring typically have an annual turnover of just R1 to R300 million. Perhaps the most important element of full factoring, which small businesses have not yet realized, is that it essentially looks beyond its own balance sheet to its own portfolio of debtors. This makes it an extremely attractive option when your own balance sheet may not be healthy enough to apply for a bank loan.
If you can prove that reputable debtors owe you money during full factoring, there`s a good chance you`ll be eligible for full factoring – despite the lack of a balance sheet service. In this way, full factoring allows you to solve the problem of your balance sheet while growing your business. As a recourse factoring company, Merchant Factors does not have to charge a higher fee to offset some of the risk. This means you`ll benefit from competitive factoring fees if you choose to partner with Merchant Factors. In both England and South Africa, the question of the validity of a debtor`s right of set-off against an assignee or assignee is particularly relevant when companies access credit by selling their debts to a bank or factoring company. In the Bibby case, Morleys Limited had delivered goods to certain customers and assigned the debts owed to them by those customers to Bibby Factors Northwest Limited. Bibby, in turn, had sent a notice to Morley`s debtor telling them that all their debts to Morleys had been assigned to Bibby. The notice also asked debtors to deal with Bibby only with respect to the debt, noting that during repayment, "any right of set-off in respect of a sale they make to [Morleys] is not permitted." Morleys entered insolvency proceedings in England and Bibby initiated legal proceedings against the debtors in order to recover the amounts due in respect of the debts transferred. The debtors counterclaimed, arguing that they were entitled, inter alia, to a discount from Morleys of 10% of the price they had paid for each delivery made in a given calendar year (payable in January of the following year). They argued that the amounts of their rebates should be deducted from the amounts owed to Morleys.
At first instance, the judge issued a summary judgment allowing the debtors to offset the repayment against the amount owed to Bibby. Bibby appealed, arguing, inter alia, that the notice informing the debtors of the assignment of their debts precluded any right of set-off with regard to the discount. They argued that the debtors should have informed Bibby that the assigned debts owed to them would be subject to discount agreements. However, they had not done so during the 13 years during which they regularly confirmed to Bibby the balances of the amounts they owed to Bibby. The English legal system is supported and complemented by the doctrine of fairness, which gives the judge the discretion to consider the facts and circumstances of a case and to assess whether granting a "fair remedy" (in this case) would prevent injustice against the parties. If the debtor`s claim does not arise from the same contract as that which leads to the assigned debt, the Court of Appeal confirmed that the test for determining whether fair set-off can be applied is whether the "counterclaim." in such a close connection with [the applicant`s] allegations that it would be manifestly unfair to allow him to perform the payment without taking into account the counterclaim" (Geldof Metaalconstructie NV v. Simon Carves Limited [2010] EWCA Civ 667). Notwithstanding the fact that the obligation to pay the rebate may not have arisen from the same contract from which the debt arose, the Court of Appeal concluded that there was a sufficiently close link between the request for follow-up and the outstanding debts. As a result, debtors were entitled to deduct discount payments from their debts to Bibby.
It was also found that debtors were not required to voluntarily provide information on contractual arrangements to which Bibby was not a party once they had been notified that their invoices had been sold to Bibby. The general position on the right of a debtor to set off against an assignor (assignee) under South African law is that a debtor is not permitted to set off amounts owed to it by an assignor against a debt owed to an assignor if those receivables have not yet been liquidated at the time of the assignment, even if these amounts are liquidated at the time the claim is made against the debtor (Oudtshoorn Town Conseil v. Smith 1911 CPD 558). This general position is subject to the following two limitations: In the unlikely event that your customers are unable to pay the invoices you sold to the factoring company, the "recourse" or "no recourse" portion of your contract will take effect. In South Africa, recourse factoring accounts for the bulk of the accounts receivable financing industry. In fact, you`ll have a hard time finding no-resort factoring in South Africa. Nevertheless, it is good to know the difference. Like any factoring service provider in South Africa, Merchant Factors does not offer non-recourse factoring.
However, this factoring specialist goes to great lengths to collect your invoices and avoid making deals when companies have customers with bad credit and poor payment histories. With a no-recourse factoring contract, the factoring company accepts a greater share of the risk of non-payment by your customers. While this may sound appealing from a risk management perspective, it`s important to be aware of the cost: Another misconception that often prevents companies from viewing full factoring as a financial instrument is that it requires the task of controlling their own accounts receivable. This is not the case at all. Full factoring only involves managing one`s own debts. This means that the bank or factoring house first contacts the debtor to inform them that the debt has been programmed and to set up the necessary accounting and payment processes. Once these are initiated, this relationship will only be maintained appropriately. This will not affect your business relationship with the debtor in any way.
In this way, you always conclude a contract with the debtor on price, discounts, delivery, etc. Contrary to popular belief, the disclosure that an invoice is taken into account does not mean that one`s own business is in trouble. What we are seeing more and more in the marketplace is that large debtors and departments are all too happy to deal with reputable banks and factoring companies as opposed to small businesses. Compared to some small start-ups, banks and factoring companies typically already have the accounting systems and processes in place to facilitate payment – in many cases where they have already dealt with these debtors. They know how they want to prepare their statements, for example, and can make them available in the desired format. .