By: Estefanía Ortuño
Commercial contracts are instruments that facilitate the day-to-day operations of traders. Some of them are used as financing or guarantee tools, although in practice, the use of different contracts is not common, due to the lack of knowledge of the way they operate or their implications. Each commercial contract has its own characteristics and modalities that respond to the needs of merchants. In this article, we will address the similarities and differences between the Factoring contract and the Discount contract with the objective of managing to determine the particularities that distinguish each contract and the aspects that help merchants.
The authors Miguel Ángel Agúndez, Julián Martínez-Simancas and Jaime Velázquez, indicate that the Factoring contract is the one that makes possible the transmission of commercial credits, originated from the commercial activity that the merchant has with its clients, which are transmitted to another merchant specialized in the Factoring activity. The latter must be a financial credit establishment or a legal entity, which undertakes, in exchange for the transfer of the receivables, to provide certain services related to the receivables.
The Factoring and Discount Contracts Law, Decree 1-2018 of the Congress of the Republic of Guatemala, defines the factoring contract as: “ARTICLE 2. Definitions… f. Factoring Contract: By the factoring contract, a seller or assignor, assigns in favor of a factor, totally or partially one or several credit rights, so that the latter performs one or several of the following functions:
- Advance resources of the credit right that is the object of the assignment.
- Receive the credit right(s) as a discount, as defined in paragraph e) of this article.
- Manage a portfolio of assigned credit rights.
- Notify the debtor of the credit rights that are the object of the contract, the assignment or discount of the credit right.
- Collect in its own name or in the name of the seller the credit rights that are the object of the contract.
- Protect or manage the protection to the seller against the non-payment of the debtor of the credit right.”
The Factoring contract, according to some jurists, is more than a mercantile contract used for the financing of merchants. It is not only an isolated assignment of credit with the purpose of obtaining a sum of money, since it includes the rendering of services to which the contracting party may opt for.
This contract has the advantage of guaranteeing 100% risk coverage for the assignor of the receivables, thus avoiding the administrative costs of debt collection. Although only 80% or 85% of the nominal value of the debt is financed, this contract involves subcontracting services for the benefit of the borrower, such as: invoice collection management, guarantee against insolvency risks, payment of receivables under contractual conditions, advances of funds, commercial information on debtors and judicial management of uncollectible receivables (non-payment).
Among the modalities of this contract, the following may be listed:
- By its content: Factoring with financing and without financing.
- By its execution: Factoring with notification and without notification.
- By the risk acquired by the factor: Factoring with resources and without resources.
- By the nature of the debtor: Domestic (local) and international factoring.
The above is an interesting alternative for traders, due to the lack of infrastructure or human resources that they might lack at the time of executing the activities on their own account. Factoring is often used for short-term sales of consumer goods on open account, and even for continuous export sales. It should be clarified that, within the Guatemalan legal system, the factoring activity is not limited only to banks, so that any individual or legal entity may provide these services, and may or may not be subject to the supervision of the Superintendency of Banks.
The author, María del Carmen Miranda Leyva, states that discounting is an operation used by companies that need to obtain liquidity prior to the maturity of credits drawn in their favor. It involves the exchange of future capital that will be collected at a future date, for the equivalent of the capital at present (at the time of discounting). The author emphasizes that this operation is used by traders who do not have liquidity, have secured capital in the future, but need to obtain the money immediately.
In accordance with the decree we previously mentioned, a discount contract shall be understood as: “ARTICLE 2. Definitions… e. Discount contract: By the discount contract, the discounter assigns in favor of the discounter a credit right of future maturity, in exchange for an amount previously agreed between them. “On the other hand, the Code of Commerce, Decree 2-70 of the Congress of the Republic of Guatemala, establishes that the Discount is: “ARTICLE 729. Discount. Discount shall be understood as the mercantile operation in which the discounting party transfers to the discounting party a credit of future maturity, and the latter makes available to him the amount of the credit, prior deduction of a sum fixed by mutual agreement. The discounter shall be liable for the payment of the transferred receivable, unless otherwise expressly agreed”.
For his part, the author Pedro María Garayoa Alzórriz establishes that discounting can be perfected in two ways: a) By creating a discount line, where the client presents to the bank all the documents he wishes to be discounted, and the Bank can set a limit to the amount of documents; or, b) Circumstantially, when the client wishes to obtain immediate liquidity, he only presents certain documents to acquire the necessary amount. These two modalities have been implemented, since not all merchants wish to have a discount line, due to the obligations that this modality entails with the Discounter. The main difference between the two types of discount is the term, since in the first one the contract is prolonged in relation to the second modality where the obligation is concluded when the amount of money is acquired. In both modalities, prior to the execution of the discount contract, the merchant had to carry out another commercial operation between him and his client. This operation is perfected by means of a credit document such as a bill of exchange or other credit instrument that has the “discountable financial effect”.
When contracting the discount under the discount line modality, the bank proceeds to advance the amount of money to the businessman against receipt of the receivables, assuming the obligation of collection from the third party, without being responsible for the non-payment. Therefore, if the collection is not successful, the bank will proceed to charge its client, in the corresponding account, a commission plus expenses incurred by the non-payment of the third party. In the case of Circumstantial Discount, the Bank will charge a higher commission for assuming the risk of non-payment by the third party.
In the commercial field, the discount contract is an important credit activity, since it is one of the most widely used commercial contracts, in addition to being one of the main methods of financing, liquidity and credit for merchants, since its nature is essentially credit. In the Guatemalan commerce, discounting is also not classified as an activity exclusive to banks; therefore, these services may be provided by individuals or legal entities, whether or not supervised by the Superintendency of Banks.
Similarities And Differences Between the Two Contracts:
From the foregoing, the following similarities can be identified between the factoring contract and the discount contract:
- The purpose of both contracts is to provide the applicant with liquidity, in order to avoid the interruption of commercial operations, by means of the advance of the amount of the credits they have.
- In the Discount contract, as in the Factoring contract, a banking institution or simply an individual or legal entity may be involved.
- There is a transfer of receivables, the term of which is of future maturity.
- Since 2018, factoring ceased to be an atypical contract and was typified within the Guatemalan legal system, as well as discounting, which was already regulated in the Code of Commerce; additionally, they are now regulated by a specific law.
The main differences between the two contracts are as follows:
- Factoring, depending on the modality, operates as a collection system, through the rendering of several related services, while Discounting is only performed to obtain a certain amount of money (liquidity) and the relationship concludes when the required amount is delivered.
- In the Factoring contract there are different modalities, within which the provision of services, the guarantee for non-payment by the debtor may be agreed, or even agreed internationally, while the Discount does not materialize these possibilities.
Despite their differences and similarities, it can be concluded that both contracts are used as a financing tool for merchants, and that since their incorporation into Guatemalan legislation, the use of factoring contracts has increased. Likewise, since the regulation of the Factoring contract within the legal system, Guatemala has set a legislative precedent, since the regulation not only regulates the contract, but also establishes the possibility of transferring credits documented in credit titles, accounting books or any other document.
This regulation responds to the evolution of society and markets, and respects the spontaneity of Commercial Law and the freedom of the parties to agree. However, it is necessary for the legislator to elaborate a Regulation for the Factoring and Discount Contracts Law, where the main modalities of the Factoring contract and the way of operating of each one is implemented.
- Miranda Leyva, María del Carmen, Analysis of financing products and services: ADGN0108, Spain, IC Editorial, 2016. Page: 126.
- Álvarez Didyme-dòme, Manuel José, Contratos mercantiles, Bogotá, Universidad de Ibagué, 2012. Page: 212.
- Sevilla Siglo XXI, S.A., Cuaderno para emprendedores y empresarios: gestión financiera, Spain, El Cid Editor, 2009. Page: 105.
- Garayoa Alzórriz, Pedro María, Operaciones Auxiliares de Gestión de Tesorería, Spain, Macmillan Iberia, S.A. 2009. Page: 60.
- Agúndez, Miguel Ángel, Julián Martínez-Simancas and Jaime Velázquez, Manual jurídico del mercado bancario: las operaciones de activo, Spain, Wolters Kluwer Spain, 2015. Page: 97
- Bravo Chuquillanque, Edward, Documents used in foreign trade, Peru, El Cid Editor, 2009. Page: 10
- Trade Facilitation Implementation Guide, United Nations Economic Commission for Factoring, Switzerland, 2012, availability and access: http://tfig.itcilo.org/SP/contents/factoring.htm
- Congress of the Republic of Guatemala, Decree 1-2018 Ley de los contratos de Factoraje y Descuento.