Commercial Leasing and Factoring Contracts for Businesses

Contract: Leasing

Contract leasing is of Anglo-Saxon origin and is not specifically regulated in our system, so it is considered an atypical contract. It consists of the following: a leasing company (a joint-stock company or a credit institution) transfers, in exchange for regular payments, the right to use a durable, movable, or immovable asset for a given period, with the option to buy at the end for a residual price fixed in advance.

The structure is triangular and relates to three subjects:

• Seller: the manufacturer or retailer of the asset.
• Leasing company (lessor): the entity that purchases and therefore owns the asset.
• Lessee (the funded): the entrepreneur or business that needs the asset. The lessee mandates the leasing company to buy the asset and receives the right to use it in exchange for periodic payments, with the option to purchase it at the end of the contract.

In practice, the employer (lessee) selects the asset and the manufacturer or retailer that offers it. The leasing company buys and owns the asset, and the lessee pays a fee in exchange for use.

Forms of Leasing

There are various forms of leasing:

• Lease-Back: This method generally involves only two parties. It occurs when a company that owns an asset sells it to the leasing company, which then leases the use of the asset back to the original owner. Therefore the lessee and the seller are the same person.
• Renting: Renting is not strictly a form of leasing but is a contract very similar to leasing. It typically occurs when funders are commercial companies that own a fleet of assets and transfer them for rent to users.

Contract: Factoring

Contract factoring is a contract whereby a person called the factor undertakes, in exchange for a commission or fee, to collect claims or credits (accounts receivable) on behalf of another party. The factor can act as assignee or as a collection agent, and may advance funds to the contracting party in anticipation of invoice amounts, deduct fees and interest, and keep records of sales.

Factoring is common and typically not regulated in the same way as banking products; however, administrative authorization may be required for its establishment. The factor's management activities include promoting the recovery of receivables. Collection management conducted by the factor can be performed on the factor's own behalf or as a collection agent (on behalf of another), and the factor may assume the risks of debtor insolvency depending on the agreement.

The purpose of the factoring contract is that, through it, one party (the customer) obtains early liquidity, reduces the risk of nonpayment of receivables, and transforms fixed costs into variable costs.

Obligations of the Client

1. Transfer or assign the receivables (credits) to the factor.
2. Pay a sales commission or factoring fee to the factor.
3. Inform the factor of any circumstances affecting each debtor.

Obligations of the Factoring Entity

1. Provide management services, accounting, and recovery of the claims assigned by the customer.
2. Investigate and monitor the creditworthiness of the buyers (debtors).
3. Maintain the current account of credits and provide regular accounting records to the client.