Factoring Agreement (Philippines)

A Factoring Agreement in the Philippines governs the arrangement between the parties and the conditions on which it operates.

Under Section 3 of RA 11657, factoring is defined as a financial transaction and a type of debtor finance in which a business sells its accounts receivable to a third party (the factor) at a discount. Unlike a secured loan where receivables are pledged as collateral, factoring is an outright purchase — title to the receivables transfers from the client to the factor, and the factor assumes the risk of non-collection from the account debtors (in non-recourse factoring) or may have recourse against the client if account debtors fail to pay (in recourse factoring).

Section 9 of RA 11657 requires all persons regularly engaged in the business of purchasing receivables — acting as factors — to register with the SEC as a financing company under Republic Act No. 8556 (Financing Company Act of 1998). The SEC issues a Certificate of Authority to Act as Financing Company before a factor may legally operate. The minimum paid-up capital for financing companies is set by SEC Memorandum Circular No. 3 (2006): PHP 10,000,000 for Metro Manila-based companies and PHP 5,000,000 for provincial companies.

Section 12 of RA 11657 governs the rights of account debtors — the customers whose invoices have been sold to the factor. Once the account debtor receives written notice of the factoring, the account debtor must pay the factor directly. The account debtor retains all defenses it had against the client (such as breach of contract, product defects, or setoff rights) and may raise those defenses against the factor under Section 12(b) of RA 11657. This statutory protection for account debtors distinguishes Philippine factoring law from some foreign jurisdictions.

For value-added tax (VAT) purposes, the Bureau of Internal Revenue (BIR) under Revenue Memorandum Ruling No. 10-2000 treats factoring as a financial service. The discount income earned by the factor (the difference between the face value and the purchase price of the receivables) is subject to income tax and VAT under Section 108 of the NIRC if the factor is a VAT-registered financing company.

The legal framework governing the Factoring Agreement (Philippines) in Philippines draws on several key statutes and regulatory bodies. Under Philippine law, the Civil Code of the Philippines (Republic Act No. 386) governs contractual obligations. The Revised Corporation Code (Republic Act No. 11232) regulates corporate entities through the Securities and Exchange Commission (SEC). The Labor Code of the Philippines (Presidential Decree No. 442) and Department of Labor and Employment (DOLE) govern employment matters. The Data Privacy Act of 2012 (Republic Act No. 10173) and the National Privacy Commission (NPC) protect personal data. The Bureau of Internal Revenue (BIR) administers tax obligations under the National Internal Revenue Code. Parties executing a Factoring Agreement (Philippines) in Philippines should confirm the document reflects current law, including any amendments enacted since the original drafting date. The National Internal Revenue Code (RA 8424) sets the foundational requirements.

A Factoring Agreement in the Philippines is needed whenever a business sells its receivables to a factor to obtain immediate working capital, and the parties want a legally compliant contract under the Factoring Act of 2021 (RA 11657).

A Factoring Agreement is needed when a small or medium enterprise (SME) has outstanding invoices to large corporations or government agencies with 60- to 90-day payment terms and needs immediate cash to fund its operations. The SME sells its invoices to a factor at a discount (typically 85–95% of face value) and receives cash within 24–48 hours instead of waiting for the buyer to pay.

A Factoring Agreement is needed when a manufacturer or distributor regularly sells to a large retail chain under long payment terms and wants to outsource the credit risk and collection function to a professional factor. Under non-recourse factoring, the factor absorbs the risk of buyer non-payment due to insolvency, providing the manufacturer with credit insurance alongside financing.

A Factoring Agreement is needed when a construction contractor or IT services company needs to monetize progress billing invoices approved by a government agency or private client. The factor purchases the approved invoices and handles collection from the government agency, providing the contractor with liquidity to fund ongoing work.

A Factoring Agreement is needed for SEC regulatory compliance when a financing company provides receivables purchase facilities to clients. Section 9 of the Factoring Act (RA 11657) requires all factors to be registered with the SEC. The written Factoring Agreement is the primary document evidencing the factor's purchase of receivables and its compliance with RA 11657 notification and disclosure requirements.

A Factoring Agreement is needed for BIR tax compliance to establish the nature and timing of income recognition by the factor (discount income at purchase date), the client's tax treatment of the discount as a financing cost, and the VAT implications of the factoring transaction under Revenue Memorandum Ruling No. 10-2000.

A valid Factoring Agreement in the Philippines must contain the following essential elements to comply with RA 11657, the Civil Code, and BIR and SEC requirements.

Parties and Regulatory Status: Full legal names of the factor (the financing company purchasing receivables) and the client (the business selling receivables), their SEC Registration Numbers, TINs, and the factor's SEC Certificate of Authority under RA 8556 and RA 11657. Including the factor's Certificate of Authority number demonstrates regulatory compliance to both the client and third parties.

Purchase of Receivables: A clear statement that the factoring is an outright purchase of receivables — title transfers from client to factor upon each purchase — and not a loan secured by receivables. This characterization determines the accounting, tax, and insolvency treatment of the transaction.

Eligibility Criteria: The criteria that receivables must meet to be eligible for purchase — minimum invoice amount, maximum debtor concentration, required documentation (original invoice, delivery receipt, purchase order), invoice age limits, and approved account debtors. Ineligible receivables (disputed, diluted, or contra-account receivables) should be excluded.

Purchase Price and Discount: The advance rate (the percentage of face value paid to the client at purchase, typically 85–95%), the discount fee or factoring charge (the factor's compensation expressed as a percentage of face value per month or per annum), and the mechanics for computing and settling the reserve (the balance of the purchase price held by the factor until collection).

Recourse vs. Non-Recourse: Whether the factoring is with recourse (the client must buy back uncollected receivables after a defined collection period) or without recourse (the factor bears the credit risk of account debtor non-payment). This is the critical commercial distinction that determines whether the transaction is effectively a loan (recourse) or a true sale (non-recourse).

Notice to Account Debtors: The mechanism for notifying account debtors of the factoring assignment under Section 12 of RA 11657 and Article 1626 of the Civil Code — specifying that payment must be made directly to the factor, the factor's payment instructions, and the consequences of paying the client after notice.

Representations and Warranties: The client's warranties that each purchased receivable is genuine, legally valid, unencumbered, undisputed by the account debtor, and free from prior assignment. Breach of these warranties triggers recourse against the client regardless of whether the factoring is nominally non-recourse.

Additional compliance elements for a Factoring Agreement (Philippines) used in Philippines include: Under Philippine law, the Civil Code of the Philippines (Republic Act No. 386) governs contractual obligations. The Revised Corporation Code (Republic Act No. 11232) regulates corporate entities through the Securities and Exchange Commission (SEC). The Labor Code of the Philippines (Presidential Decree No. 442) and Department of Labor and Employment (DOLE) govern employment matters. The Data Privacy Act of 2012 (Republic Act No. 10173) and the National Privacy Commission (NPC) protect personal data. The Bureau of Internal Revenue (BIR) administers tax obligations under the National Internal Revenue Code. Forms-legal.com provides this template as a starting point for Philippines-compliant documentation.