Some tips for guarding against legal risks in commercial factoring

Factoring is a comprehensive financial product that contains trade financing, commercial credit investigation and accounts receivable management in one entity. Since the Bank of China pioneered factoring in the PRC in 1992, the factoring business in China has grown at a rapid clip. According to incomplete statistics, factoring turnover – including bank factoring and commercial factoring, but excluding third-party payment type, electronic commerce type and supply chain financing type – in China in 2012 was probably greater than RMB10 billion (US$1.6 billion).

Economic significance

Factoring is a comprehensive credit service where the true transaction background of the buyer and seller serves as the support, and the creditor transfers the accounts receivable that have arisen with the debtor to the factor, and the factor provides such service functions as financing – usually the amount of the financing will not exceed 80% of the total amount of the accounts receivable – sales ledger maintenance, collection of accounts receivable, credit risk control and bad debt security. Factoring includes bank factoring provided by banks and other such financial institutions, and commercial factoring provided by non-financial institutions. As factoring answers the needs of enhancing domestic and foreign trade competitiveness, it has become a new trade financing instrument which, together with letter of credit business and credit insurance, forms the troika for assuring trade receivables.

Proof of establishment

Commencing in 2004, a number of commercial factoring companies in China have received approval to engage in factoring business, and in May 2006 the State Council issued the Opinions on Issues Relevant to Promoting the Development and Liberalisation of Tianjin Binhai New Area encouraging the area to take the lead in certain financial areas. Subsequently, Tianjin municipality submitted the “Plan of Tianjin Binhai New Area for Comprehensive Complementing of Reform, Experimentation and Financial Innovation”, listing factoring as one of the innovations, and the plan was approved in October 2009. With this, commercial factoring companies finally obtained formal recognition, and commercial factoring firms could now register in Tianjin.

Zhen Qinggui is a partner and Zou Wen is a legal assistant at Zhonglun W&D Law Firm in Beijing