In January 2021, the Nuova Definizione di Default (New DOD) came into force, establishing that a party is considered past dueif in arrears for more than 90 consecutive days on a payment due to their bank.
In this brief article, I will sum up the opportunities provided by factoring operations for companies and clarify some aspects that might have caused alarm.
Up until 31 December 2020, a customer operating with recourse factoring might have resulted past due owing to late payments by their clients (assigned debtors), without direct responsibility and with limited possibility of intervention, except to close their exposure by paying instead of their client.
With the entry into force of the New Definition of Default, however, a company that assigns its trade receivables to the Bank through a factoring with recourse agreement can be considered past due only if its exposure to the Bank is higher than the receivables assigned. The reasons why this might happen are to be found in events subsequent to the advance of assigned receivables, such as the presence of credit notes or the non-payment of fees by the assignor. Therefore, the latter has full control over their due dates and does not depend on the behaviour of the debtors assigned to the Bank.
Therefore, a correct management of relations with customers and timely payment of fees (interest and commissions) to the Bank allow a company that has entered into a factoring with recourse agreement to retain its performing status, without the risk of being classified as non-performing owing to the past due status.
Factoring without recourse involves the assignment of the credit risk from the assignor to the Bank. The exposure assessment and the calculation of the overdue period are therefore carried out on the assigned debtor and the presence of late payments can lead to their classification as a defaulting customer.
The calculation of the days of default has changed: previously, an invoice was considered overdue when more than 90 days had passed since its original due date (or other agreed dates).
The New Definition of Default instead considers the continuity of overdue period, so a status may become past due (with the rules defined above) even if there are no individual status that have expired or are overdue by more than 90 days, but because of several outstanding invoices whose sum of continuous overdue days is more than 90 days.
This is why it is very important for companies, clearly also based on their bargaining strength, to define the due dates of invoices according to their financial standing and programming.
Another key new element is the introduction of the 3-month observation period to go back to the performing status after being classified as past due, a period during which the other party must prove to be a good payer, i.e. regularly fulfil their financial commitments without delays.
As can be seen from this brief explanation, in some areas the New DOD is stricter compared to the past, but it can also offer opportunities to be seized in order to manage operations correctly and build a profitable commercial relationship with customers and the Bank.
Pasquale Naclerio, Major Risks and Monitoring Division Manager
With a degree in Business Economics from the University of Venice after previous experience as a freelancer and as a Credit Analyst in a credit insurance company, I joined Banca Ifis in 2002. I have always covered roles related to the assessment and management of receivables, mostly concerning debtors assigned in factoring operations. In June 2019, I was appointed as Major Risks and Monitoring Department Manager, coordinating the teams working on the assessment of assigned debtors and all transactions involving larger amounts, as well as monitoring the bank’s counterparties to help identify positions at risk and contain the cost of credit of the bank.
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