Factoring activity is defined as a type of short-term financing, ono the basis of transferring a debt, according to which the factoring company purchases the current and future financial rights arising from the sale of goods or the provision of services from a customer (who is the service provider or seller of the commodity). The purchase of financial rights is either with the right of reversion; whereby in cases of default or non-payment of the buyer (the beneficiary of the service or the buyer of the commodity), the factoring company has the right to revert to the seller to collect the indebtedness, or the factoring contract could be without the right of reversion, whereby in events of default or non-payment by the buyer, the factoring company bears the risks of non-payment, and will try to collect this debt from the buyer. Needless to mention the factoring rate and financing amount vary depending on the type of factoring; whether such factoring is with or without the right of reversion, as well as depending on other factors relating to the seller’s financial and commercial position, and buyers’ liabilities associated with the factoring contract.
This means that the process of factoring has three parties: 1. The factoring company, which is the party that is allowed to engage in the activity of factoring, to which the financial rights are assigned. 2; The customer, who is the creditor, and is also the seller of the commodity or the service provider, assigning the financial rights to the factoring company; and 3. The debtor, who is the buyer of the commodity or the beneficiary of the service.
The factoring agreement is drawn between the seller and the factoring company, and the average financing term does not exceed one year in most cases. Factoring activity includes, depending on the type of factoring that the parties to the contract usually contract, four services; namely finance, account management, collection, and credit coverage.
Given the specificity of factoring activity in terms of the speed and flexibility of the decision, it is mostly practiced in non-banking companies, and the companies are either specialized in the field of factoring, or in financing activities that include factoring activity.
The importance of this activity lies in its ability to provide short-term financing needs for commercial, industrial and service establishments, especially small and medium ones, and factoring activity helps them in stimulating and increasing the rate of capital turnover, improving cash flows, and thus the growth of their activity.
The most important characteristic of this activity is specialization, as it depends on short-term financial rights, and financing is short-term, and often there are no determinants for obtaining this type of financing, and the only required guarantees are financial rights. Most of the time, the decision is made by factoring companies is quickly and with the least number of requests for financing, and therefore enterprises are encouraged to apply for this type of financing. Needless to mention that these financial rights nowadays are registered in the register of movable funds at the Ministry of National Economy.
In 2021, the European Bank for Reconstruction and Development (EBRD) provided the PCMA with a concept paper on factoring activity. The paper contained four main topics: the legal framework for financial rights and their general assignment and status in Palestine, the global principles that govern this topic and dealing with it in local laws, the different types of factoring and its use in Palestine, and recommendations and proposals regarding new legislation and best practices regarding the subject of control, supervision and regulation of the activity.
