The regulation of factoring in Nicaragua
Gerardo Hernandez
Consortium - Taboada & Asociados
Managua
In December 2010, Nicaraguan parliament enacted a law to regulate factoring. This law was a response to a great need in the banks and other financial institutions to have a basic set of rules that can regulate the increasing activity in this area.
The act is intended to set only the basic content of the contract of factoring, regulate the commercial and financial relationship between the contracting subjects and to establish the minimum requirements that must comply with the undertakings or financial corporations engaged in holding this type of legal business.
The law regulates only the activities of entities that are not in the scope of the bank laws, meaning that banks that makes factoring are not under the new law but still have to be acting under the scope of the banking laws. According to the new law, only moral persons can give the services of factoring and any company rendering those services must be organised as corporation (Sociedad Anónima) and in the act of incorporation, factoring must be expressed and the main business but can also perform activities linked to factoring.
The regulation also defines the contract of factoring for the purposes of the law and considers that only documented credits can be traded in factoring contracts, the existence of a written document supporting the credit to be transferred is a requisite for the factoring according to the article 7 of the law. The law also establishes the requisite that the contract must be written in a public deed, which in our opinion is a strong limitation to the flexibility of this kind of business, establishing the public deed as the only way to celebrate a factoring contract, was not the best solution.
Article 8 of the law also sets a minimum of requisites that must be included in any factoring contract, it only considers basic elements such as the identification of the parties, the type of factoring, the essential terms of any contract, in any case the law does not limit the right of the parties to include on the contract other clauses that they considers pertinent.
The new act defines two types of factoring:
Factoring without warranty or recourse
Non-recourse factoring involves the sale and purchase of invoices by 100% of the value of the same less a percentage or difference in price, without requiring additional warranty to the invoices subject to the transaction of sale. The factoring company fully assumes the risk of non-collectability of the debts.
Warranty or recourse factoring
The warranty or recourse factoring involves the granting of funding from the company to creditor guaranteed by 100% of the discounted bills. In this case the factoring company does not assume the risk of non-collectability of the credits. In addition to the bills discounted, by mutual agreement between the parties, the debtor can provide satisfactory collateral that secures the received funds.
Any of the types of factoring considered by the act can have the form of:
a) National Factoring, which is carried out with representatives of purchases and sales within the country credit documents.
b) Export factoring. By the mean of the purchase of credit documents documenting sales abroad.
c) Import factoring, with the purchase of receivables documents that exporters from a country grant to importers of another country, to ensure the collectability of the credit including the management services of collection and transfer of funds to the country of the exporter.
d) Corporate factoring, the global assignment of accounts receivable of a company. The factoring company may also make financial advances to suppliers as well as the payment of accounts receivable or wages.
e) Factoring of receivables from sales already made. Relating to goods or services already received by the buyer.
f) Factoring to providers: corresponds to the sale of the paper credit by the supplier to the Factor before the expiry of the duty, who will pay the provider the amount of the credit and charged to the debtor.
g) Factoring at maturity: relies on deduction of the invoice at the time that it expires, with the assignor or payer assuming the financial cost.
The new act also establishes the basic obligations and rights for each party in the contract of factoring.
For the debtor, the main responsibilities are: assigning credits and accessories rights that will give rise to their sales; guaranteeing the actual and lawful existence of the credits at the time of entering into the contract; notifying customers at there home, in the signing of the contract with the company; facilitating to the factoring company, financial and accounting information as well as payments received directly from its customers when required; not to intervene in the management of payment, unless otherwise agreed; responding to any breach of the assigned receivables if entered into in accordance with the type of factoring which provides for this responsibility; and carrying out orderly and separate contracts and accounting records.
On the side of the factoring company, the main obligations are: to ensure the receipt of all documentation provided by the debtor; manage and charge credits for their own account, unless otherwise agreed; to respect the maturity dates of the invoices to proceed to payment; to assume the risk of insolvency, unless otherwise agreed; to carry in an orderly manner and to separate its accounting records from the debtors contracts and to comply with any other obligation set out in the law, or agreed between the parties to the factoring contract.