SINHVIENNGANHANG.COM An Introduction to Factoring and Factors Chain International Copyright © Factors Chain International, Amsterdam SINHVIENNGANHANG.COM Acknowledgements This manual has been created by members of the FCI Education Committee In that process the Committee used the available FCI documentation and information supplied by members of FCI FCI would like to express their gratitude to all individuals involved in its preparation, writing and editing Notice of Copyright © This document is made available to the members of Factors Chain International (FCI) for their reference and evaluation The Dispute Prevention and Handling Manual is a major asset of FCI containing valuable information FCI has exclusive ownership and rights to it This document or its contents must not be used, disclosed or otherwise made available to any party outside the members of FCI without the prior written consent of FCI FCI reserves all rights to proceed legally against any one member in breach of the contents of this notice Originally issued: October 2001 Latest Revision: July 20062003 SINHVIENNGANHANG.COM Table of Contents Chapter One An Overview of Factoring What Is This Chapter About? A Brief Historical Background Definition of Factoring Assignment of Accounts Receivable United Nations Commission on International Trade Law (“UNCITRAL”) The Four Main Functions of Factoring Cost Components of Factoring 12 Some Varieties of Factoring 13 An Overview of Credit Insurance 16 Comparison of Export Credit Insurance and FCI Export Factoring 19 Chapter Two Factors Chain International What is this chapter about? A Brief Historical Background to the Formation of FCI The Constitution of FCI The FCI Private Forum Summary 13 Chapter One – An Overview of Factoring July 20062004 Chapter One An Overview of Factoring What Is This Chapter About? The purpose of this chapter is to give you a general understanding of factoring Historical background We shall look briefly at the historical background of factoring and see how it has developed into the range of services which factors can offer today Definition of factoring We shall then define factoring and analyse that definition in more detail Assignment We define assignment and consider its importance in the context of factoring UNCITRAL A United Nations Commission was set up to draft a convention for the regulation of assignments in international trade We study briefly its conclusions The various components of factoring You will learn about the various components, which are used to build the basic factoring product The pricing of factoring We shall examine the pricing structure and look at some of the considerations, which will affect the price that we charge our sellers Product development We shall see how we can use different combinations of the factoring components to create products, which may better suit the needs of our sellers Credit insurance Finally we shall take a look at credit insurance which can be a competitor and a friend of factoring We end this section with a comparison of credit insurance and international factoring Page - Chapter One – An Overview of Factoring July 20062004 A Brief Historical Background The origins The concept of factoring is not new Its origins have been traced back to ancient Rome where rich manufacturers and merchants used a mercantile agent or factor to administer the sales of their merchandise Records show that the use of these factor agents grew throughout the Middle Ages During the period of colonisation by European countries from the sixteenth century onwards exporters of consumer goods from the mother countries sought the help of these mercantile agents or factors to promote their trade This was especially important in the United States Their rapidly expanding population in the 19th century added significantly to the demand for European merchandise, particularly textiles, which were used in making clothes, bedding and furnishings In those times without air transport, telephones and faxes the exporters knew little about the market and the customers They also needed to maintain stocks in the country to provide prompt delivery The services of these factors usually included the following :  taking physical possession of the goods on consignment;  storing them;  finding buyers and delivering the goods to them;  collecting payment from the buyers; The factor’s remuneration for these services was a commission on the value of the goods sold and was deducted from the payments made to the principal Many factors flourished and in time were able to help the exporters with finance by making loans against the goods sent to them on consignment The security for these loans was the factor’s longstanding right to reimburse himself from the sale of the goods This right was later ratified by statute in several states by the adoption of the Factors’ Acts, which gave the factor a right of lien on his principal’s goods This right entitled the factor to hold on to goods in his possession until the loan was repaid The development of modern factoring - in the United States In the latter part of the 19th century the role of the American factor changed radically The improvement in communication and transport systems meant that an exporter no longer needed to send goods on consignment The products could be sold by a local sales agent using Page - Chapter One – An Overview of Factoring July 20062004 samples and dispatched direct to the buyer The exporters, therefore, no longer needed the factor’s warehousing, marketing and distribution services but many wanted to retain the factor’s financial services The legal basis of these financial services had been the sale of the actual goods by the factor and his right to recover his financing from the proceeds In the changed situation this could no longer happen and the factor had to rely on the exporter’s assignment to him of the accounts receivable arising from the direct sales of the goods to the buyers The basis of the factoring of accounts receivable was created by the factors’ recognition of the changing needs of their clients - and in Europe The method of raising money by assigning accounts receivable had been used in European countries for centuries The assignments were evidenced simply by copies of the relevant invoices and were not notified to the buyers This practice grew significantly in the 1950’s particularly in London It was attractive to companies in need of additional finance because of its simplicity of operation and confidentiality The discounters wrongly believed that they had the same protection as discounters of bills of exchange Many invoice discounters, however, suffered severe financial losses when some of their important sellers became insolvent They then discovered deductions from the receivables by the buyers for counterclaims or set-offs from which they had no protection and of which they had had no prior warning This experience together with the introduction of the American “model” in the early 1960’s encouraged the method of taking over the A/R on a whole turnover basis It was sometimes with and sometimes without recourse to the seller but always with notification to the buyers The financier also managed the collection of payments from the buyers In other words it was factoring in the modern sense of the word - and in Asia-Pacific In South East and East Asia the main instrument of ensuring payment and raising finance from trading, at least up to the beginning of the 1980’s, was the Letter of Credit But as in the American development, the modern revolution in communication and travel methods has created situations where the Letter of Credit is no longer appropriate The increasing demands of competition have also meant that the buyers are not so willing to commit their funds before they are able to inspect and use the products ordered This is particularly true when Asian Pacific exporters are trying to increase their trade with European and American buyers Thus the early impetus in the development of factoring in this region was in cross border factoring but the FCI Page - Chapter One – An Overview of Factoring July 20062004 statistics of World Factoring Volumes show that domestic factoring is also growing rapidly - and in the rest of the world StartingThe development of factoring began in South Africa in the early 1970’s, factoring has developed in many other countries particularly in the last ten years Factoring companies or factoring departments of banks can be found now in most parts of the world and almost all of these are members of FCI Other than in Morocco where it started in the 1990’s it has yet to be used in other African countries The 1990’s also saw the development of factoring in several countries in Latin America and its introduction in two countries, Israel and Oman, in the Middle East Definition of Factoring To find one definition that will cover the various forms of factoring arrangements that occur in one country is a difficult task To find one which will apply internationally is almost impossible Each country has its own particular language, customs, financial and business needs and law Each factoring company has different names for certain types of factoring and often different types of factoring under the same name UNIDROIT The definition used by the UNIDROIT convention At a diplomatic conference in Ottawa in May 1988 the International Institute for the Unification of Private Law in Rome (commonly known as UNIDROIT) presented " uniform rules to provide a legal framework that will facilitate international factoring " The full text of their definition contained in Article 1.2 and 1.3 is as follows (see also Legal circular 0.5 in the Legal Manual):“1.2 For the purposes of this Convention, ”factoring contract” means a contract concluded between one party (the supplier) and another party (the factor) pursuant to which: (a) the supplier may or will assign to the factor receivables arising from contracts of sale of goods made between the supplier and its customers (debtors) other than those for the sale of goods bought for their personal, family or household use: (b) the factor is to perform at least two of the following functions:     finance for the seller, including loans and advance payments; maintenance of accounts (ledger keeping) relating to the A/R; collection of receivables; protection against default in payment by the buyers; (c) notice of the assignment of the receivables is to be given in Page - Chapter One – An Overview of Factoring July 20062004 writing to the debtors 1.3 Different terminology In this Convention references to “goods" and "sale of goods" shall include services and the supply of services.” Note that the Convention talks about “suppliers”, “debtors” and “receivables”, whereas FCI has standardised on the words “sellers”, “buyers” and “accounts receivable” The Convention refers to the “assignment” of the accounts receivable and we should spend a little time studying this concept before looking in detail at the four functions mentioned in the Convention Assignment of Accounts Receivable What Is an assignment? An assignment is an agreement by a creditor (or assignor) to transfer his rights to an A/R to a third party (the assignee - in our case, a factor) and the assignee’s agreement to accept those rights without necessarily the consent of the buyer (Per F R Salinger in Factoring Law and Practice) This means in factoring that the agreement is the Factoring Agreement (or Contract) and the seller agrees to sell his rights to the A/R to the factor The purchase price is the value of the A/R transferred less the factor’s charges and any deductions (such as, cash settlement discounts) made by the buyer The factor becomes the owner of the A/R Usually, but not always, the buyers are notified of this transfer of ownership (See below) The procedures for perfecting an assignment, so that it will be fully enforceable at law against all parties, vary greatly from country to country As this is such a fundamental issue in factoring, you should research the requirements of your country’s legal system Why have an assignment? Factoring in its simplest form is the financing of the seller without providing any other service and is in effect no different from lending money against the security of the A/R As such, no ownership of the A/R is really necessary Indeed in some countries even when he is providing other factoring services, a factor does not obtain ownership of the A/R or at least not at the beginning The reason for this is usually to avoid some complex legal procedure or the payment of some form of tax An assignment of an A/R will be taken in these situations only when the factor needs to enforce his rights to the A/R by taking legal action Page - Chapter One – An Overview of Factoring July 20062004 In most cases, however, the factor does take an assignment of each A/R at the moment that it is created This procedure is administratively cheaper and more practical and the factor can more easily and quickly enforce his rights to collect payment from the buyer, using, if necessary, legal proceedings to so Notifying the buyer of the assignment One common requirement in domestic and international factoring is that the buyer is informed or (to use the technical term) notified by the seller that all present or future A/R will be assigned to the factor This notification of the assignment is important for two main reasons:1 To prevent the buyer from making payment to the seller and obtaining a valid discharge Upon receipt of the notice of assignment the buyer must treat the factor as his creditor as far as the assigned A/R is concerned If the buyer ignores the notice and pays the seller, the factor may legally compel the buyer to pay a second time You should be aware that commercially this might not be so simple If an important buyer is involved, this experience may cause him to put pressure on his other suppliers not to factor their A/R; To stop the buyer from using any claims or defences which he may have from other contracts An example of this is where the buyer is owed money for goods that he has supplied to the seller and wishes to offset his debt against the one owed by the seller This would clearly reduce the value of the factor’s security The procedure for giving notice normally consists of two steps: Introductory letter This is sent to all the buyers at the start of the factoring agreement by the factor but in the name of the seller It will advise buyers that all their accounts payable arising from their purchases from the seller have been and will be assigned to the factor until further notice This subject is examined in more detail in Chapter of the Communication Manual together with an example of the text of a letter You should make yourself familiar with the text of your company’s introductory letter Notice of assignment on the invoice This is usually printed on the invoice by the computer at the time of raising the invoice Labels printed with the text of the notice of assignment (sometimes known as “stickers”) can be used but care must be taken to avoid omitting them by mistake In some countries the notice of assignment is a legal requirement and without it the assignment is not valid in respect of the buyer In all countries it is a necessary administrative procedure to assist in the collection of the A/R See also Chapter of the Communication Manual for an example of a notice of assignment Page - Chapter One – An Overview of Factoring July 20062004 It is important to note that the notice of assignment to the buyers under Article 1.2 (c) of the UNIDROIT Convention is not optional and therefore, the convention is not applicable to any type of nonnotification international factoring United Nations Commission on International Trade Law (“UNCITRAL”) The role of UNCITRAL You can see from the previous section that the legally enforceable assignment of an A/R is a key issue in factoring In domestic factoring as long as the factor understands and follows the requirements of his own country’s legal system, there should not be a problem The assignor (the seller), the assignee (the factor) and the buyer are all subject to that system In international factoring this is, of course, not the case Throughout the world there are a number of different legal systems and the requirements for a valid assignment may differ to the extent that it may be unenforceable against the buyer or challenged by the assignor’s (seller’s) creditors In 1995 UNCITRAL set up a working group whose task it was to produce a convention with rules to regulate the assignment of A/R in international trade The principal aim of the convention is to increase the availability of credit and reduce its cost This can be achieved only if it can reduce the risks and administrative problems for those such as factors who provide that credit Naturally this is an important issue for the members of FCI and since 1997 FCI has been represented by a very experienced observer who is able to speak for the interests of the factoring industry as a whole Draft Convention In 1999 the draft convention was produced and the following is a summary of the most important rules that relate to factoring:  The effectiveness of bulk assignments and the assignment of future A/R  The effectiveness of an assignment in spite of a prohibition against it in the contract between seller and buyer This may be subject to an exclusion for government contracts  Notification to the buyer  Discharge of the buyer by payment (before and after notification of the assignment and after multiple assignments)  The buyer’s defences and rights as regard set-off and changes to the Page - Chapter One – An Overview of Factoring July 20062004 insurer’s total liability in any one year to a certain amount If this amount has been reached, then the insurer will not pay further claims that year which would otherwise be valid Example The agreed value of the bad debt is EUR 15,000 The cover provided is 90% subject to a deductible of EUR 1,000 The credit limit is EUR 10,000 The annual limit of liability is EUR 100,000 Credit limit = EUR 10,000 90% = EUR 9,000 Less deductible = EUR 1,000 Amount paid = EUR 8,000 If the insurance company had already paid claims of EUR 96,000 in respect of that year, then the insured would receive only EUR 4,000 of the above claim Catastrophe cover policy This type of policy is designed for a seller who is capable of absorbing a number of bad debts but wishes to protect himself from incurring losses over an acceptable level in any one year A large deductible is agreed at the start and the insurance cover will only come into play when that deductible has been reached Of course the higher the deductible, the lower the premium Discretionary credit limits In certain cases the insurer will permit the seller to make the credit assessment and set the credit limit The maximum size of the limits and the credit criteria that the seller must meet are clearly set out in the policy Failure to comply with these criteria will invalidate the limit and any claim on the corresponding buyer will not be paid Advantages It is a “one service” product and so can be attractive to those sellers who perceive credit cover as their major or only problem Credit insurers generally can offer a wide geographical coverage Usually their response to credit limit requests is fast The pure cost of the premiums can be lower than the cost of factoring credit cover Disadvantages The risk of non-compliance with the policy conditions This can be a considerable burden on the seller’s administration It is the seller’s responsibility to prove that he has a valid claim Claims can take weeks and sometimes months to be paid Cover is restricted to between 80% and 90% of agreed credit limits Page - 18 Chapter One – An Overview of Factoring July 20062004 Comparison of Export Credit Insurance and FCI Export Factoring Feature Credit Insurance Factoring Assignment of Accounts Receivable No Yes Often No 180 days 180 days No - between 80% & 90% Yes Line Cover per Buyer Yes Yes Credit Assessment Fee Often No Deductible Often No Limit of Annual Total Liability Often No Payment under Guarantee 180 days 90 days Formal claims procedure Yes No Political Risk Optional Yes Insolvency of buyer prior to shipment Optional No Debt collection service Optional Yes No Yes Whole Turnover Maximum Payment Terms 100% cover of approved receivables Accounts Receivable financing STATISTICS OF FCI FACTORING VOLUMES We recommend that you study these to get an appreciation of the business involved for different types of factoring product and a comparison of the FCI member volumes with all factoring companies You can see these on the FCI Private Forum, File Library Section, Service Quality The figures are available from 1993 onwards Page - 19 Chapter two – Factors Chain International July 20062004 Chapter Two Factors Chain International What is this chapter about? Before we study the technical details of international factoring we should first get to know the organisation that makes it possible, Factors Chain International or FCI Historical background of FCI We shall look briefly at the historical background of FCI and learn why and how it was started The constitution of FCI We shall then study FCI’s legal constitution, its objectives, administrative structure and the qualifications for full and associate membership The FCI Private Forum Finally we explain what the FCI Private Forum is, where to find it and describe its various features Page - Chapter two – Factors Chain International July 20062004 A Brief Historical Background to the Formation of FCI The first factoring company in Europe The first factoring company founded in Europe was International Factors Ltd in London in 1961 The founder-shareholders were a London Merchant Bank, a London Confirming House and, most important of all, the First National Bank of Boston (FNBB), which was already running a large and successful factoring operation in the USA FNBB decided that the trade between the USA and the United Kingdom offered a good chance to develop international factoring Although they chose local partners, they still had to invest a considerable amount of management time at the early stages of the company’s development Little was known locally about this new financial tool and so FNBB’s know-how was needed to get the business started FNBB also found partners in other Western European countries to start joint venture companies nearly always with the name: International Factors The idea was that these companies would factor the trade between their countries as well as their own country's trade with the USA There was also another important USA factoring company entering the European market in the early 1960's: Walter E Heller & Company of Chicago They approached the development in a different way Their objective in setting up companies in various countries with local bank partners was to develop domestic factoring in each country rather than international business The International Factors Group was set up as a closed network: in other words, their international business would only be conducted with sister companies in the various countries This would ensure that a seller who had exports to several countries could receive, through the EF, identical paperwork from each IF The origins of FCI By the mid 1960’s there were several factoring companies in most West European countries and they needed correspondents to handle their growing volume of international business FCI traces its origins to a co-operation agreement in 1964 between two companies, Shield Factors of London and Svensk Factoring of Stockholm Shield Factors became part of Griffin Credit Services (now HSBC Invoice Finance (UK) Ltd) and Svensk Factoring is now known as Handelsbanken Finans Svensk Factoring was already working closely with companies in other Nordic countries, now known as DnB Page - Chapter two – Factors Chain International July 20062004 Factoring A.S of Norway, NCM Forenede Factors A/S of Denmark and Nordea Finance Finland Ltd., and so was used to working a “two factor” system It was these fiveThese companies which met in Baden-Baden, Germany met , to decide how this group of "independent" factors should operate At a further meeting in 1968 in Stockholm they decided to form FCI with a permanent Secretariat in Amsterdam The first official Council meeting was held in June 1969 in Scheveningen, Holland, and 29 member companies attended The first constitution was adopted and it stated, among other things, that FCI would be open to all factoring companies that were able to meet certain basic criteria except to those which were already members of a "closed network" An open chain The arguments that led to the decision to make FCI an “open chain” rather than a “closed chain” have remained valid to this day  With several members in each country an open chain will become more efficient because competition between each member will demand that the best levels of service are maintained  Market forces and competition are considered to be more powerful instruments than common shareholding when it comes to providing sellers with the best service Nevertheless FCI's members realised that great efforts would be needed if the open chain were to grow into a closely collaborating network The competition stressed that a closed chain with common shareholders would give a better service and provide uniformity in its reporting Existing FCI members were anxious to help new members in other countries In so doing, they would be able to offer a better country coverage to their sellers The transfer of know-how from the more experienced to the less experienced members has been and still is one of the strong forces binding FCI's open network Seminars and round table conferences are organised to assist in this transfer of technical knowledge and experience In addition FCI has created a legal framework and standard operating procedures for international factoring to be used by all its members Page - Chapter two – Factors Chain International July 20062004 The Constitution of FCI The Constitution document When we use the terms "FCI" or "the Chain", we are referring to a group of more than 150 factoring companies in more than 50 countries Because the headquarters of FCI is in The Netherlands, the legal structure of this group is a Dutch association called a "vereniging" which has been registered in accordance with Dutch law The Constitution is made up of two elements:  The Articles of Association - these set out the broad structure of FCI and have to be registered; and  The By-laws - these contain the more detailed rules which are more likely to need amendment as FCI develops These amendments can be made without having to go through the formal registration procedure (see under “The Council” below) The registration is done in the Dutch language but for ordinary purposes the English translation can be used The full English text is in the Legal Manual which can be found in the library section of the FCI Private Forum For the purposes of this course it is not necessary to make any distinction between the Articles of Association and the By-laws The objectives The objectives of FCI are: to promote the growth of international factoring transactions, to promote the use of the General Rules for International Factoring (“GRIF”), to consider all problems related to methods of conducting the business of the factoring industry The Council The Council is the highest authority within FCI It alone can establish the policy and the general principles of operation of FCI The Articles of Association, the By-laws, the GRIF, the edifactoring.com Rules and the Rules of Arbitration can be amended only with the approval of the Council It consists of full members and associate members but only full members have the right to vote on the above issues The voting rights of associate members are limited to the election of the Chairman and those three candidates for ordinary membership of the Executive Committee who gain the highest number of votes from both full members and associate members Page - Chapter two – Factors Chain International July 20062004 The Council must meet at least once a year Additional meetings may be called by the Executive Committee or at the request of at least 10% of the members The Executive Committee This Committee can best be compared to a board of directors of a business corporation or company Article of the Constitution states that FCI shall be managed by the Executive Committee The Executive Committee also appoints the Secretary General and has the power to set up technical committees The Executive Committee consists of ten members: a Chairman, two Vice Chairmen, an Immediate Past Chairman and six other members (seven if there is no Immediate Past Chairman) The Chairman is elected by the Council for one year but may be re-elected for one more consecutive year Whether he has served as Chairman for one or two years, he will automatically remain on the Committee for one more year as "Immediate Past Chairman" to give continuity If a Chairman is unable, for whatever reason, to continue in office, the Executive Committee must appoint a Vice-Chairman to be acting Chairman until the end of that year Whilst any factoring companies may join FCI regardless of the affiliation to other groups or organisations (Rule 2) certain restrictions apply to the composition of the Executive Committee The reason for this is that some FCI members are affiliated to organisations which directly compete with FCI and so the possibility of a conflict of interest may arise if persons involved with such organisations should also take a leading position in FCI by joining the Executive Committee Rule a), therefore, defines expressions “competing factoring group”, “competing group officer” and “officer” and then sets out the following restrictions An officer of a member which is also a member of a competing factoring group may not serve as the Chairman The following may not serve on the Executive Committee:      Technical committees more than two officers of members located in the same country; more than two officers of members related to each other; more than two officers from associate members; more than two officers of members which are also members of a competing factoring group; any competing group officer These committees - usually made up from among specialist staff from member companies - can be established by the Executive Committee for specific purposes either on a continuous basis or for a limited time only Provisions for their expenses must be made each year in FCI's budget Page - Chapter two – Factors Chain International July 20062004 and approved by the Council The Technical Committees provide working reports to the Executive Committee which at its own discretion may distribute them to the members At present there are four Technical Committees: Legal Committee The Legal Committee deals mainly with the Constitution of FCI, the General Rules of International Factoring (GRIF), edifactoring.com Rules and the Rules of Arbitration as well as creates and revises the Legal Circulars (see below under Legal Framework) All these documents are contained in the Legal Manual Both Constitution and GRIF are often changed in some detail as a result of decisions taken by the Council at the Annual General Meeting In some cases the Council approves a change in principle but leaves the exact wording to be drafted by the Legal Committee It also deals with other legal issues such as UNIDROIT and UNCITRAL where it represents the whole of the factoring industry Communication Committee The Communication Committee deals with all matters relating to the transfer of information between members You will learn in the Communication Manual later in the course about the importance of standardised systems The committee has been busy keeping pace with the rapid developments in data processing and methods of communication In the last few years it has been much occupied with the preparation of the EDI systems and software edifactoring.com, the latest development was successfully introduced in April 2002 and is mandatory for all members Marketing Committee The aim of the Marketing Committee is to help FCI achieve its first objective - “to promote the growth of international factoring transactions” Its efforts are directed not only to those countries where FCI has members but also to those countries where FCI is seeking members Education Committee The principal task of the Education Committee is the development and implementation of FCI’s educational policy The most important part of that task is the course you are studying – The FCI Course on International Factoring Work was started on the course in 1986 and it was first presented to members in 1987 Since then the committee has been involved in keeping the course up-to-date and setting and marking the diploma examination The Secretariat The Secretariat is the collective name for the Secretary General and all other employees of FCI The Executive Committee appoints the Secretary General who is directly responsible to the Executive Committee for the administration of FCI and the implementation of the decisions taken by the Council and Page - Chapter two – Factors Chain International July 20062004 the Executive Committee The Secretary General must ensure that minutes of the Council, the Executive Committee and the Technical Committees are prepared and circulated The Secretary General and all other employees of the Secretariat must be independent of any member of FCI Membership of FCI If a company wants to become a member of FCI it must apply in writing to the Chairman through the Secretariat The Executive Committee will consider and make its decision upon the application at its next meeting It is possible that one or more of the FCI members in the applicant’s country may have information that in their opinion should bar the applicant from membership Therefore, at least one week before the Executive Committee meeting the Secretariat must inform all the FCI members in the applicant’s country Any of these members may object to the application but must so before the Executive Committee’s meeting If the Executive Committee approves the application and the member renews the objection within one month of the decision, then the matter will go to Council The decision of the Executive Committee can be overturned only by a threequarter majority vote of the Council If the Executive Committee does not approve an application, any member may lodge an appeal with Council on behalf of the applicant Again the Executive Committee’s decision may be overturned only by a three-quarter majority vote Qualifications for membership In applying for membership a company agrees to honour the Articles of Association and the By-laws and to:1 Comply with the application procedures; Pay the fees; Adhere to the legal framework of FCI; Implement and use Edifactoring.com not later than six months from the date of membership; Co-operate in all FCI market surveys and questionnaires Applicants must be well-reputed companies or departments of banks or finance companies that provide a factoring service They must have net assets of not less than the equivalent of USD 2,000,000 The Executive Committee may approve exceptions to this when, for example, the applicant is a subsidiary of a major bank and FCI has received adequate written assurances from the parent bank The FCI membership must be informed immediately of any such exception Page - Chapter two – Factors Chain International Associate membership July 20062004 No company can become a full member without first becoming an associate member The reason for this is to provide a trial period for both the new member and FCI to see whether each are suited to the other and to allow the new member time to build up the required volume of business If after three years the associate member does not meet the qualifications for full membership, then he can remain an associate member provided that:  he maintains a two-factor volume with other FCI members measured over the immediate past calendar year or the most recent consecutive 12 months as registered by the edifactoring.com statistics of at least EUR 5,000,000; or  the Executive Committee in an annual review allows his continuation as an associate member Otherwise he must resign as a member of FCI Full membership To qualify for full membership the associate member must be able to demonstrate the following:  Sponsorship by three unrelated full members, who have experience of the applicant’s ability and willingness to handle FCI import and export business  Two-factor volume with other FCI members measured over the immediate past calendar year or the most recent consecutive 12 months as registered by the edifactoring.com statistics of at least: EUR 20 million provided that each of export factoring and import factoring has exceeded EUR million; or EUR 40 million consisting entirely of import factoring or export factoring  Adequate participation in FCI activities, such as the correspondence course, seminars and questionnaires  Compliance with the requirements of Associate Membership There is a restriction on the number of related companies that can be full members Rule e) limits this number to 10% of the full membership and where 10% does not equal a whole number then the next higher whole figure is used If the total number of full members should fall, then the number of related full members must be reduced in line and the principle of “last in first out” would apply The reason for this rule is simple enough: FCI wants to avoid the situation that a block vote by a large number of related companies could have an excessive impact on the decision making process Page - Chapter two – Factors Chain International July 20062004 Rule gives the definition of a "related company" as: “ a company shall be deemed to be related to another company if, but only if: (c) it is directly or indirectly the holding company or subsidiary of that other company; or (d) it is directly or indirectly under the same director or shareholder control as that other company.” An earlier admission to Full Membership is possible by a Council vote with a three-quarter majority If a full member should fail in any one year to achieve the volume criterion of USD 20,000,000, then he will revert to being an associate member in the following year To regain full membership he must again satisfy the full membership qualifications Termination of membership Under Article of the Constitution the Executive Committee has the right to terminate membership of a member who: (c) no longer fulfils the qualifications of membership, or (d) fails to pay his membership fee or any other fee or charge within three months of its being due, or (e) no longer fulfils its obligations under the Articles or By-laws In addition, after a three-quarter majority vote the Council may terminate the membership of any member for any reason whatever by giving one month’s notice The FCI Private Forum What Is the FCI Since July 1999, FCI has its own private Web site, the FCI Private Private Forum Forum? The FCI Private Forum is the virtual FCI house that all FCI members can visit This virtual house has several rooms filled with books (the File Library) that you can read or take and a large meeting room with a message board (the Message Forum) where you can post your messages and read other people’s messages FCI encourages you to explore its virtual house It contains the knowledge accumulated over more than 30 years of international factoring experience by thousands of factoring professional from over 50 different countries Page - Chapter two – Factors Chain International July 20062004 To help you to learn how to use the FCI Private Forum all its parts and functions have their on-line user instructions The File Library The file library contains a wealth of information organised in different sections Each section contains files related to the topic that gives the name to that section Among other information you can find:  All circulars issued by FCI from 1997 to date,  The latest version of all FCI manuals and documents,  All edifactoring.com files,  FCI factoring statistics and the “Factor of the Year Awards” from 1993 to date,  The latest version of the complete Member Catalogue,  The invitation, programs and minutes of all current meetings,  The possibility to register on-line to current FCI meetings,  The latest IFIS and Annual Accounts of several members of FCI All files are in one of the Microsoft Office programs formats (Word, Excel, PowerPoint and Access), or in Acrobat Reader format, or in “zipped” format that contains one or more files You can download a file to your PC or view its contents on-line How to Use the File Library Since February 2000 all circulars, Member Catalogue updates, new and revisions of manuals, edifactoring.com files, meeting documentation etc are distributed exclusively via the FCI Private Forum They are no longer sent by physical mail The only means of receiving information from FCI, therefore, is to download files from the file library This procedure is not really different from what happened when the FCI Secretariat sent documents by physical mail The mail was then received by your mailroom and delivered to the FCI contact person for further distribution in one or more copies Page - 10 Chapter two – Factors Chain International How you know when new documents are in the library? July 20062004 It is easy to know when the FCI Secretariat places new documents and files into the file library  You can either enter the “What’s New” section of the FCI Private Forum and ask for the list of new files since any number of days you specify, or  You can subscribe to “What’s New” You will then receive by email the automatic notification of all new files and you can download them without the need to enter the FCI Private Forum You can also search the file library to find files that contain words or topics you are looking for The search facility uses a very powerful search engine Whatever FCI document you are looking for, “old” or “new”, the file library is the place to find it The Message Forum The message forum is a public bulletin board Its only purpose is to provide a forum for public discussions where members of FCI exchange their views on FCI issues or factoring in general You are strongly encouraged to start a discussion on the message forum How many times have you thought of some issues that FCI should look at, or perhaps differently? How many times have you faced a special situation and wondered how other members of FCI dealt with it? Next time it happens, use the message forum You will discover how easy is to have the opinions of your colleagues around the world or simply to “pick their brains” The message forum, however, is not there for posting private message to the FCI Secretariat or to another member of FCI You must ensure that you never this You must send your private messages by other means such as e-mail or fax Any private message to the FCI Secretariat is automatically disregarded no matter how important or urgent it is Page - 11 Chapter two – Factors Chain International July 20062004 How to Use the You can post new messages, reply to existing messages or simply read Message any on-going discussion The message forum uses a 'threaded' way to Forum display messages: replies to a message are shown together with the original message and all subsequent replies You can of course visit the message forum regularly to see if there are new interesting messages, but that is not necessary It is easy to know when new messages are posted onto the message forum You simply subscribe to it You will then receive by e-mail a copy of all new messages without the need to enter the FCI Private Forum Note, however, that if you want to post a message you can only it by typing it in the appropriate message forum section You cannot create an e-mail and send it to the message forum This is for security reasons and to prevent messages with attached files that may contain a virus You can also search the message forum to find messages that contain words or topics you are looking for The search facility uses a very powerful search engine Other Features of the FCI Private Forum How You Can Access the FCI Private Forum Apart from the file library and the message forum, the FCI Private Forum has many other powerful features The most important are:  You can search on-line the entire Member Catalogue to find the information you are looking for,  You can send private e-mails to any other member of FCI of to the FCI Secretariat without knowing their e-mail address Your e-mail will be safely delivered This very convenient feature is another good reason not to post private messages onto the message forum,  You can change your password, e-mail address, create new users, etc The FCI Private Forum is a Web site on the Internet; the address is www.fci.nl To access it you must have an Internet connection and a Web browser that supports Java script Once you are connected to the site www.fci.nl, you must enter a user ID and password to enter the FCI Private Forum Your company’s system administrator knows the required user ID and password Page - 12 Chapter two – Factors Chain International July 20062004 Summary Since its creation in the late 1960’s FCI has made impressive progress The membership has grown from five companies in five countries to more than 150 companies in over 50 countries The legal structure has been set up with the Constitution, the GRIF, the edifactoring.com Rules and the Rules of Arbitration The organisational structure is working well under the leadership of the Executive Committee and the Secretariat Operational systems have also been developed to a high degree of sophistication, as you will learn later With the growth of FCI it is no surprise that the growth world wide in factoring has also been impressive, not just in the total volume of factored turnover but in the number of companies and countries that are actively involved in this business FCI is not just concerned with the administration of factoring but with the development of its market as well Page - 13 [...]... two companies, Shield Factors of London and Svensk Factoring of Stockholm Shield Factors became part of Griffin Credit Services (now HSBC Invoice Finance (UK) Ltd) and Svensk Factoring is now known as Handelsbanken Finans Svensk Factoring was already working closely with companies in other Nordic countries, now known as DnB Page 2 - 2 Chapter two – Factors Chain International July 20062004 Factoring. .. Chapter One – An Overview of Factoring July 20062004 An Overview of Credit Insurance Background Credit insurance in many ways is a similar service to the credit cover provided by factoring It can, therefore, be a competitor but it can also be an ally of factoring Sellers can take out credit insurance instead of the credit cover provided by factoring and sign a recourse factoring contract They can choose... where to find it and describe its various features Page 2 - 1 Chapter two – Factors Chain International July 20062004 A Brief Historical Background to the Formation of FCI The first factoring company in Europe The first factoring company founded in Europe was International Factors Ltd in London in 1961 The founder-shareholders were a London Merchant Bank, a London Confirming House and, most important... the factor is obliged to provide finance on demand based on the total A/R It will also cover the advice the factor may give to the seller concerning credit control and administration and to cover the costs of periodic visits by the factor to the seller to inspect the sales ledger and his business in general Who can benefit? For the seller who does not need the service elements of factoring and is only... contract They can choose credit insurance plus bank financing and so refuse factoring A factoring company can have a credit insurance policy in order to provide the full non-recourse factoring service rather than underwriting and taking the risks itself This last aspect of credit insurance is covered in the Buyer Risk Control Manual What is credit insurance? A credit insurance policy (contract) provides... Holland, and 29 member companies attended The first constitution was adopted and it stated, among other things, that FCI would be open to all factoring companies that were able to meet certain basic criteria except to those which were already members of a "closed network" An open chain The arguments that led to the decision to make FCI an “open chain rather than a “closed chain have remained valid to. .. experienced members has been and still is one of the strong forces binding FCI's open network Seminars and round table conferences are organised to assist in this transfer of technical knowledge and experience In addition FCI has created a legal framework and standard operating procedures for international factoring to be used by all its members Page 2 - 3 Chapter two – Factors Chain International July 20062004... working capital to finance expansion  More finance available than from conventional bank borrowing: it is geared specifically to the A/R and therefore to the growth in the seller’s sales  more turnover = more A/R = more finance  Suppliers can be paid promptly and so the seller can doubly benefit from reducing costs by taking advantage of prompt payment discounts and improving his credit standing with... overheads and provide protection Nonnotification factoring This is sometimes referred to as “invoice discounting”, "confidential factoring" and “undisclosed factoring In essence it is purely finance The A/R are still assigned to the factor but the buyers are not notified of the assignment The seller collects the accounts receivable and pays the Page 1 - 14 Chapter One – An Overview of Factoring July... Chapter One – An Overview of Factoring July 20062004  What is meant by “qualifying A/R” will depend on the type of factoring used: for full service factoring it will be the credit covered A/R and for recourse factoring it will be the A/R that meet certain control criteria Page 1 - 9 Chapter One – An Overview of Factoring Advantages July 20062004 The main advantages of factoring finance may be summarised ... the historical background of factoring and see how it has developed into the range of services which factors can offer today Definition of factoring We shall then define factoring and analyse... insurance plus bank financing and so refuse factoring A factoring company can have a credit insurance policy in order to provide the full non-recourse factoring service rather than underwriting and. .. insurance which can be a competitor and a friend of factoring We end this section with a comparison of credit insurance and international factoring Page - Chapter One – An Overview of Factoring July