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The Principles And Procedures To Apply To Factoring Transactions

April 2015 - Corporate & Commercial. Legal Developments by Baspinar & Partners Law Firm.

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The Banking Regulation and Supervision Authority ("BRSA") of Turkey published the Regulation on the Principles and Procedures to Apply to Factoring Transactions (the "Regulation") in the Official Gazette on February 4, 2015.

The Regulation provides the principles and procedures that shall be applied by the factoring companies and banks for their factoring transactions. The Regulation is issued based on article 1, second paragraph of article 9 and first paragraph of article 38 of the Financial Leasing, Factoring and Financing Companies Law dated 21.11.2012 (Law No: 6361).

No Transaction without Invoice

Financing can be only provided to the customer in consideration of the invoices or equivalent documents which are issued by the customer for its sale of goods or services.

The total of the finance amount and the revenues of the financing entity such as interest and commissions shall not exceed the total amount of the invoices or the equivalent documents. In case of a 100% financing, the interest and commission revenues can be separately collected from the customer. Financing entity cannot have additional invoices from the customer for differences occurring due exchange rate fluctuations or the differences between the invoice amount and the promissory note amount taken as collateral.

Intelligence Research on the Customer

The financing entities shall not act solely depending on the information provided by the customer. The financing entity shall conduct its own research including but not limited to the following;

  • Controlling the content of the invoice by taking the definition and form of the invoices provided by the relevant legislation into consideration,
  • To set up an internal control system enabling the financing entity to conduct research on the invoice. The system should not approve any financing transaction without confirming that there is no duplicate of such invoice under the Central Invoice Recording System ("CIRS")
  • To assess the financial status and transaction history of the customer and develop procedures that would provide confirmation of the customer's receivable with application to the debtor of the customer's invoice or issuer of the promissory note which the customer is the beneficiary of.

No Duplicate Invoices

As mentioned above, the financing entity should check that there is no duplicate of the invoice in the CIRS. The financing entity should keep copies of the invoices.

Since we have been referring to the Central Invoice Recording System, we would like to mention briefly what the CIRS is. Article 43 of the Financial Leasing, Factoring and Financing Companies Law provides that factoring companies and banks shall consolidate the information concerning the receivables they took over including invoice information in a form that the Financial Entities Association deems appropriate. Based on article 43, the Central Invoice Recording System is set up by the Financial Entities Association basically to create a common document database, to prevent the financing entities to incur damages due to financing based on duplicate invoices and to provide reporting.

Cancellation of Invoices

The financing entities shall take an undertaking from their customers providing that in case of an invoice cancellation, the customer shall immediately inform the financing entity and if a new invoice is issued replacing the cancelled invoice, such invoice to be submitted to the financing entity. The Financial Entities Association shall prepare a standard form of undertaking to be used by the financing entities for such purpose.

Negotiable Instruments and promissory notes

In case any negotiable instrument or other sort of promissory note is taken by the financing entity for a receivable arising from an invoice, the customer which is the creditor of the invoice shall be the one endorsing the negotiable instrument to the financing entity. Furthermore, the issuer or the last endorser of the negotiable instrument before the customer shall be the debtor of the invoice. The amount of the negotiable instrument and the invoice shall be in consistency.

In case the financing entity request additional negotiable instruments as additional security from the customer which are not related to the invoices that form the base of the financing, such negotiable instruments can be enforced and collected only if;

  • The receivable becomes due and not paid,
  • Such additional negotiable instruments are not used for financing of the related parties of those negotiable instruments,
  • The financing entity has registered the additional negotiable instruments as security in its transaction and accounting records.

It is also important to note that the financing entities can collect the additional negotiable instruments only after starting legal proceedings, reserving relevant provision and recording the receivables in its accounts as provided by the Regulation.

Assignment of Receivables that are not due

The receivables arising from the sale of goods and services that will become due in future may be only assigned under the following terms;

  • An agreement should be signed between the financing entity and the customer about the assignment of receivables. Such agreement should include explanation of the transaction, the amount assigned or if the amount cannot be determined at the time, the relevant data to calculate the amount, the maximum factoring limit and the payment terms.
  • The receivable to be assigned shall be documented with relevant documents such as the agreement between the customer and its debtor, orders, pro forma invoices, letter of credit documents, etc.
  • The accuracy and consistency of documents proving the commercial relation because of sale of goods or services forming the base of future receivable shall be assessed and controlled and such control shall be documented,
  • The invoice that will be issued when the receivable becomes due shall be provided by the customer to the financing entity and added into the transaction file.

Keeping the Documents

The financing entities shall keep the documents related to their transactions including the intelligence researches for at least 5 years.