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Factoring and business relationships: how best to manage them

Factoring provides a very flexible solution for companies that need a way to pass on their trade receivables and manage their cash flows. Companies sometimes have concerns about how this financial arrangement might affect their business relationships.

We put this to Luca Cioccolanti and Alessandro Glavina, sales representatives for the Ancona branch, and they outlined the various factoring options, and the best procedures to follow in relation to the customer (assigned debtor).

How does the assignment of credit impact the business relationship between the company and its customer?

Factoring is a particularly useful way to support the needs of companies operating in sectors where the deferral of payments to customers is a critical factor in success; or when firms working with Public Administration find it hard to match the timing of payments with the demands of suppliers.

In the same way, factoring is a useful tool if a company’s turnover is linked to just a few customers: a situation that is hard to manage with ordinary advances on sales invoices, because of the “risk concentration” limits normally imposed by banks.

There are many advantages to the factoring solution, which can be summarised as follows:

  • The opportunity to transform outstanding receivables into cash resources;
  • A reduction in the problems associated with risk concentration, as the factor takes on all the invoices owed by the debtor;
  • Optimisation of cash flows;
  • Minimisation of non-payment risks, and of administrative costs related to the credit portfolio;
  • Improvement in relationships with customers.

Does the credit transfer arrangement need to be agreed in advance with the customer?

The assignment of receivables is strictly regulated by the Civil Code, in particular by Articles 1260 et seq. Although this does not stipulate that the debtor must give his consent to the assignment of receivables, provided these are not personal debts or that their transfer is prohibited by law, it is still vital that the assignee is informed about the transfer, so that he knows to whom payment is due. The assignment will only take effect when the debtor has accepted it, or when he has received notification.

It is therefore always important to ascertain in advance whether your customer is willing to accept an assignment of credit, to ensure you do not put in place arrangements that the debtor does not like.

The procedure known as non-notification factoring provides an exception to this rule, for in this case the assigned debtor is not informed about the transfer. This form of transaction is mainly used to circumvent any explicit prohibition of transfer in a contract, or to safeguard the party’s reputation. Needless to say, this type of transaction is extremely risky for the factor, as it is based on the understanding that the customer is someone of high standing and financially sound.

Could my relationships with my customer deteriorate after the transfer?

No, the assignment of receivables in a factoring context is seen as a normal part of company life. Indeed, it is considered a sign that the supplier is careful about his financial management, uses the latest best practice, and keeps a close eye on his receivables and on planning his relative cash flow.

If my customer does not want to recognise the transfer of receivables, or takes a long time to do so, can I use a different system?

If the debtor does not intend to recognise the transfer of receivables, you can make use of a so-called Notification of Assignment of Receivables. Under this system, Banca Ifis makes the advance payment after informing the debtor that the receivable has been assigned, but without having to wait for the latter to reply.

On the other hand, if the debtor does intend to recognise the transfer of the receivables, but takes a long time to do so, you can submit a formal Notification stating a particular limit: i.e. a set time scale within which advance payment on the assigned receivables can be made, following notification of the assignment and pending receipt of recognition by the debtor.

Advertising message for promotional al purposes. For the contractual conditions of Factoring and Deferral of Payment of Trade Receivables, please refer to the information sheet available at our branches and in the Transparency section of the website