Can we say any of the following? “All mushrooms are edible”, “All mushrooms are toxic”, or “All mushrooms are psychoactive”. There are about 64,000 known types of mushrooms and each one has its own differences to be named differently, although its fundamental characteristics make it a mushroom.
During my long-time studies on factoring, I read more than a hundred different definitions of it. I even wrote an article on these definitions. In that article, I tried to create the best one, but I think it was a try of impossible. You cannot define all kinds of factoring in a single sentence. You can only define the basic characteristics of factoring as mycology experts do for mushrooms. Mushrooms (fungi) are classified differently from plants and animals although they are vivant. Like factoring, it is not only financing, is not only a service.
Factoring is not primarily a financing instrument. If you read the first article of the General Rules for International Factoring (GRIF) you see that it is the collection and/or the book-keeping and/or the protection against bad debts of an assigned receivable but not directly a financing product. Indeed, you can do maturity factoring without any financing, but you cannot call a transaction factoring if none of the above functions exists.
Despite this, in many jurisdictions, we see it better in FCI’s Legal study answers that factoring is considered as a loan. Yes, you can consider invoice discounting as a loan. Financing with recourse factoring receivables also can be called a loan from a point of view. However, what about maturity factoring of any kind, or factoring without recourse, where the factor is responsible for the payment of the purchase price of the assigned receivable to its client?
Do you call the early payment of a bank to its point-of-sale client against a credit card voucher as a loan to the client? Or is this a loan to the customer of the bank’s p.o.s. client? Payment is made to bank’s p.o.s. client (store) but the customer (buyer) is debited. International factoring and credit card transactions have many similarities. Factoring is mainly for B2B, a credit card is generally for B2C transactions.
When people see factoring as a loan, they call its discounting charge as interest. Interest is the rent of money. In invoice discounting, or in any kind of with recourse factoring where the financing party receives the assignment as collateral to the loan, this is still somehow called as factoring, you can name the change as “interest” because the financing party gives a loan and expects this loan will be paid by its customer. It has the receivables as collateral for recovery when needed.
In without recourse factoring and even in FCI’s with recourse factoring, assignment makes the assignee the owner of the receivable from the date of shipment of the goods or fulfilment of the services that such receivable relates. From the assignment, the factor is in debt to its client for the amount of receivable. In accordance with GRIF article 12, there is no difference between recourse and non-recourse assignments. If the factor is in debt to its client for the purchase price of the receivable for any non-recourse factoring, recourse case is like a consignment sale
here, then any prepayment is not a loan, on the contrary, is part of the payment of this debt. There can only be a discount, not an interest. Do you call it a loan when you buy something on account to be paid within three months, but you pay less when you have money earlier than the due date? Or, is the discounted part of a purchased good’s price an additional income for you that you collect as the rent of your money paid? No. You only pay less.
Misuses of the terms lead to misunderstandings on the real value of factoring. When you ask the man-in-the-street in some countries “What is factoring?”. Their answer is so simple: “A type of legal usury”. Is it so simple? Maybe the application that they see is like they think about. Can we call all types of factoring usury? Can we say that all mushrooms are toxic? Some mushrooms are delicious and beneficial for health, people pay a lot for truffles, for example.
Some countries prepare to change the name of the instrument. It is like changing the name of mushrooms because some toxic mushrooms are used to kill people. Why don’t we try to learn the best parts of factoring and get benefits from it? For example, international factoring is one of the best solutions in recessions in addition to its role of increasing sales and steady growth in normal times.
Factoring has recently been defined in the Standard No:59 of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), based in Bahrain, a respected organization in the Islamic world. This standard, which is basically for the sale of debt, says that as long as the factor pays the same amount of the receivable to the seller, this is an acceptable factoring transaction.
The official recognition of factoring by AAOIFI is important and will increase the potential transaction volume of factoring in general by the addition of Islamic Word that avoids interest in all transactions. This also constitutes a confirmation of acceptance of Islamic International Factoring by AAOIFI as in FCI’s international factoring, interfactor financing does not take place and the import factor is responsible for the payment of purchase price of the receivable in full against a service charge (factoring commission).
The best solution to misunderstandings about factoring, instead of judging factoring as a whole, I think, is to group different types of factoring and to decide on which ones are loans, which ones do not contain any financing and which ones are financing but not loans, like grouping the mushrooms as toxic, edible, and psychoactive.
About the Author
Yüce is a member of the FCI Legal Committee, a former factoring executive, instructor, training consultant and author with a Masters in Law degree.
After having served several international factoring companies, he worked as the CEO of four factoring companies and one leasing company until 2003. His first book on the Code (in Turkish) was published by the Turkish Factoring Association in 2002 and is still the only book outlining the rules of international factoring. The book’s uniqueness and success led to Yüce being invited onto the Legal Committee of FCI in 2003, on which he has served ever since. In 2005, Yüce wrote the book Dış Ticaret İşlemleri ve Finansmanı (International Trade Methods and Financing) that was published by Boğaziçi University. He has also published several articles on legal matters such as expert witnesses, fixed asset depreciation in tax laws and on different factoring subjects as well as Islamic International Factoring, the latest product of FCI. He took part in the preparation and revision of many FCI documents including the preparation of the first drafts of “The GRIF with Commentary”, “Supplemental Agreement for Islamic International Factoring” and “The General Rules for FCIreverse.”. Yüce has been lecturing on international trade, finance and accounting at several universities in Turkey for twenty years. He has also given international legal seminars for FCI on the General Rules for International Factoring (GRIF) and Purchase Order Management (POM) in several countries of the World.