The concept of the factoring of trade debts is simple and straightforward. It is a continuing arrangement by which a financial company (“the Factor”) purchases all the trade debts of a merchant, manufacturer or provider of services (“the Supplier”). By the giving of notice of transfer of ownership of the debts to each customer on each invoice raised together with directions to pay the Factor the Supplier is relieved of the need to keep a sales ledger but may debit each sale to one account—that of the Factor; and by the outright purchase of the debts by the Factor without recourse in the event of the insolvency of a customer (subject to his approval of the customer’s credit standing) the Supplier is provided with protection against bad debt losses. It is this relief from all the tasks associated with the administration of a sales ledger and from the incidence of bad debt losses, which is usually described as the factoring “service,” for which the Supplier pays the Factor a fee (a service or administration charge) ranging from a fraction of 1% up to around 2% of the face value of the invoice representing each debt, according to the nature of the business.

Apart from the administrative advantages the Supplier may, at his option, and in consideration for a discounting charge, obtain a financial benefit by drawing from the Factor a large part of the purchase price of each debt as soon as goods have been sold and delivered and the resultant debt sold to the Factor. The purchase price is usually the amount payable by the customer less any discounts and allowances due to him and less the Factor’s administration and discounting charge; and the Factor will usually pay up to 80% of the purchase price at once, if so required. A balance is retained against which the Factor may set off his rights of recourse for disputes or counterclaims raised by the customer.

However, the simplicity of the concept is in direct contrast to the complexity and esoteric nature of legal problems which may and very often do arise in the United Kingdom in the relations between the three parties, the Supplier, the Factor and the customer, in certain sets of circumstances. The difficulties seem to the layman to have arisen from the origins of factoring in this country. Having been well established in the United States since the latter part of the last century, when the Factors changed their function from that of mercantile agents to the purchasers of trade debts, it was transplanted into the U.K. without much change in the method of operation. Whereas the American systems and procedures were well established in commercial usage and custom and fully recognised in the Uniform Commercial Code, in England and to a greater extent in Scotland, the service, as a tender seedling, was embedded into a basis of law which was not designed to receive it.