There is an important conceptual difference between interest rates and purchase factors, although they are closely associated. Interest is the remuneration of capital for the time during which it is used in a credit operation.The purchase factor is the price paid for the sale of a credit right.
Factoring in Brazil
- AABHAS KSHETARPAL, ROLL NO.: 856, V SEMESTER,
B.B.A. LL.B. (HONS.), NATIONAL LAW UNIVERSITY, JODHPUR
FINANCING ACTIVITY IN BRAZIL – IN TERMS
OF NUMBER OF COMPANIES
FINANCE COMPANIES LEASING COMPANIES FACTORING COMPANIES
FINANCING ACTIVITY IN BRAZIL – IN TERMS
OF NUMBER OF TOTAL LOANS (BILLIONS)
LEASING COMPANIESFACTORING COMPANIES
EVOLUTION AND DEVELOPMENT
Factoring, known in Brazil as ‘fomento mercantil,’ is a
service activity that includes ongoing advisory work on
credit, risk, accounting, inventory, and working capital
management, in tandem with the irrevocable purchase
of credit rights, in the form of receivables that arise from
the sale of goods or services with a typical maturity of 30
to 60 days.
There are an estimated 717 known factoring companies
in Brazil, which provide services to more than 65,000 small
and medium enterprises.
Eighty percent of these enterprises belong to the industrial
sector, with a monthly turnover of around US$1 billion.
Brazilian enterprises obtained about US$10 billion (R$27
billion) as creditor rights resulting from mercantile
sales, representing 6 percent of all domestic sources of
This figure constitutes an impressive increase of around 50
percent over 1998 (US$7 billion, R$19 billion).
Brazil’s factoring companies are located mainly in the
Southeast (51 percent), South (21 percent), and Northeast
(17 percent), with more than 250 in the state of São Paulo
SECTORS ACCOUNTING FOR FACTORING
ACTIVITY IN BRAZIL
Textile Industries, 2%
PRICING INTEREST RATES AND THE
The cost of a factoring operation has two components:
a fee for the provision of services and
the price, or the ‘purchase factor,’ for the purchase of receivables.
The fee for the provision of services is fixed ad valorem.
The purchase factor is the price paid for the sale of a
Factoring companies use as a base the ‘factor ANFAC’
(Associação Nacional das Sociedades de Fomento
Mercantil; Brazilian Factoring Association) to quote the
price of factoring services in Brazil.
The factor is published daily and varies with the
money market or certificado de depósito bancário
(bank certificate of deposit; CDB).
The components of the factor ANFAC include the
opportunity costs of resources, assessed in terms of
the CDB rate, operational costs, taxes, and
The purchase factor varies with industry conditions
and the creditworthiness of the customer.
The purchase factor was more than twice the interbank lending rate in
February 2003, at 4.4 percent per month (67.7 percent per year
equivalent), compared to the prevailing CDB interest rate of 1.83
percent (25.7 percent per year equivalent).
As expected, this was also higher than the prevailing average bank
discount rate for commercial invoices, which was 58.5 percent per year
at the same time.
Factoring companies point out, however, that this rate is effective and
final, while banks’ effective interest rates are higher, as other bank
charges are added to the rate, such as a credit issuance fee, a price
for receivables, overheads, retention of a percentage of the loan’s
value, product sales, and so forth.
However, many of the factor’s clients may not be able to obtain lower
rates through bank discounts or any other formal financing.
FACTORING VERSUS BANK SERVICES —
CONTRAST AND COMPLEMENTARITY
Credit operations No credit operations, but purchase
of credit rights (receivables)
Obtains funds from the public to
invest in credit operations by means
of financial intermediation.
Only operates with resources not
collected from the public; no
Remuneration consists of interest
rates for the use of capital during a
period of time.
Remuneration does not have an
interest rate or discount rate but the
payment of a price for the sale of
services and the purchase of credit
Needs authorization from the Central
Bank (Law No. 4595/64) to operate.
Is not a financial intermediary; a
commercial activity that only operates
with legal persons; does not require
authorization from the Central Bank.
Operates with legal persons and
Only operates with legal persons or
professionals that are considered to
be legal economic entities.
Profits are generated by means of a
spread between financing and credit
Price includes all cost items (market
interest rate, operational costs, taxes)
and the expected profit and risks.
Factoring normally uses the negative credit information
systems of the two principal private credit bureaus of
Brazil, SCI (Segurança ao Crédito e Informações; Credit
and Information Security) and SERASA. Factoring
companies are both users and producers of information.
As a result of these differences, factoring has several
benefits over funding from bank loans
First, funding can be obtained more rapidly.
Second, for the provider of credit, the exposure is limited
to the amount of invoices issued to the seller, and the
creditworthiness of the seller is less important.
Third, this allows for companies in legal difficulty to borrow from
factors, because factoring depends on the creditworthiness of
the seller’s customers.
On the contrary, banks do not have an incentive to lend to firms
in financial distress, as this could imply a higher risk classification of
the loan and would mean higher capital requirements.
Under the prevailing bankruptcy law, unlike factors, banks have
not been permitted to operate with companies in receivership.
Fourth, it is clear that factoring will have considerably higher
implied rates of interest than bank loans, but this can be
explained largely by the composite nature of services
provided, the need for much closer client scrutiny and
knowledge, and the limited sources of finance available to the
factor, who must rely largely on internal resources.
Challenges to the legitimacy of factoring are
compounded by suspected illicit activities of some
firms, which have been known in particular to offer services
outside their legal scope.
For example, deposit taking or loan provision.
One of the main objectives of ANFAC, the factoring
company trade association, is to delimit factoring from
other activities, sometimes illegal, of financial
intermediation, without the required approval of the
Central Bank, or grant loans at usurious interest rates under
the name of ‘factoring.’
ANFAC has agreed on a model of factoring contract
(contrato de fomento mercantil) to be used by its
associates, has issued a Code of Ethics (Código de Ética
e Auto-Regulação), has approved a set of General Rules
for Factoring Operations (Regulamento Geral das
Operações de Fomento Mercantil)
In 1999, reached a Technical Cooperation Agreement
(Acordo de Cooperação Técnica) with the Economic
Law Secretariat of the Ministry of Justice (Secretaria de
Direito Econômico do Ministério da Justiça).
The agreement has three basic objectives:
(1) to recognize and preserve factoring as a means of
supporting productive activities,
(2) to protect affiliated companies by means of a
‘qualification and quality’ certification, and
(3) to establish a system of technical cooperation with
the Federal public administration to prevent the
emergence of illegal activities under the guise of
factoring. ANFAC has been petitioning strongly for a
specific factoring law to help eliminate illegitimate
activities and protect its members.
First, factoring companies, unlike banks, do not pay interest, as there
are restrictions against their access to funds from third parties in the
market. Thus, they cannot deduct from their income any interest
expense, and taxes affect them more heavily. This tax burden is
passed to clients as the additional costs of factoring services.
Second, as they undertake commercial transactions to purchase
receivables, the tax note, invoice, and duplicata (credit right)
associated with such sales must be issued.
The commercial transaction is subject to the Imposto de Circulação
de Mercadorias. Law No. 5474/68 (Article 20) allows service
providers to issue invoices and commericial invoices representative
of their rights.
Next, the service provider is subject to a tax on
services, the Imposto sobre Serviços (Tax on Services;
ISS), which is locally collected with a tax rate varying from
0.7 percent to 5 percent, depending on location.
Sometimes, factoring companies are asked to collect the
ISS on overall revenue (service provision plus revenues
from purchase of receivables). An additional charge, the
COFINS (Contribution for the Financing of Social Security)
tax, does not take into account the dual nature of
factoring activities, and the tax base includes both the
revenues for service provision and the revenue for
Third, factors are taxed in the same way as banks in terms of financial
Another indirect tax, the Imposto sobre Operações Financeiras (Tax
on Financial Operations; IOF) on financial transactions, which was
established by Law No. 9532/97 for credit operations of financial
intermediaries, includes factoring companies in its scope (Article
58), although factoring companies are not financial intermediaries.
Moreover, factors complain that they should be exempted from the
On the other hand, credit transfers (cessão de créditos) between
financial intermediaries or between financial intermediaries and
leasing companies are not subject to the IOF (Decree 2219/97, Article
8, VII), and factors do not benefit from this. These appear to be
contrary to principles of equality of tax treatment.
International factoring in Brazil is undeveloped, especially
relative to the large size of the domestic factoring sector.
The most significant obstacle to the development of
international factoring is that factoring companies in Brazil
are not allowed to hold foreign-currency accounts.
Thus, they are not able to make advances to the exporter
in the currency of their invoices, which introduces
exchange rate risk. It would thus be difficult to serve the
export community without involving commercial banks.
If conditions for permitting international factoring
could be eased, export companies could reduce
their risks. Italy and the United Kingdom have
extensively used factoring to involve SMEs in
In Latin America, countries such as Mexico have
also begun to engage in international factoring.
In contrast, in Brazil, exports are carried out by big
companies with more access to financial services
from conventional financial intermediaries.
TURNOVER FROM FACTORING IN THE
AMERICAS AND THE WORLD
REST OF THE WORLD
Brazil, 12012.00 Chile, 2650.00
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