- May 10, 2026
- Posted by: АРОУ
- Category: Publications
In modern business, factoring has become an effective tool for managing accounts receivable and improving liquidity. However, to ensure that a factoring transaction does not become a source of legal or financial risks, it is essential to properly structure the agreement and thoroughly verify the counterparty. In this article, we will discuss how to legally approach factoring transactions and what to pay attention to when selecting a factor.
What Is Factoring?
Factoring is a financial service in which one party (the client) transfers its right of claim against a debtor for delivered goods or provided services to another party (the factor). In return, the factor provides financing to the client — either in advance or after the debtor pays the debt.
Main Types of Factoring
- Recourse factoring — the client bears the risk of the debtor’s insolvency.
- Non-recourse factoring — the factor assumes the risk of non-payment.
- Disclosed factoring — the debtor is informed about the change of creditor.
- Undisclosed factoring — the debtor becomes aware of the assignment only at the payment stage.
Legal Structuring of a Factoring Agreement
To ensure legality and security, a factoring agreement must comply with several requirements.
1. Clear Definition of the Subject Matter
The agreement should clearly define:
- Which monetary claims are transferred;
- Who the debtor is;
- On the basis of which documents (contracts, invoices, delivery notes, acts) the debt arose.
2. Written Form of the Agreement
Although notarization is generally not required by law, the agreement must be executed in writing. It is also recommended to prepare registers of transferred claims.
3. Rights and Obligations of the Parties
The agreement should clearly specify:
- Financing conditions (advance payments, сроки, commissions);
- Conditions for repayment in case of recourse;
- Procedures for notifying the debtor.
4. Warranties and Representations
The client should guarantee that:
- The assigned claims are valid and free from encumbrances;
- The debtor does not dispute the debt;
- There are no third-party claims regarding the transferred obligation.
5. Debtor Notification Procedure
This is critical because the right of claim transfers to the factor only after the debtor has been properly notified. Failure to notify the debtor may result in risks related to enforceability against third parties.
Counterparty Due Diligence: Factor and Debtor
Before entering into a factoring agreement, it is recommended to:
- Review state registries, court databases, and tax records;
- Assess the financial condition of both the factor and the debtor;
- Check for previous disputes or cases of non-payment;
- Verify the absence of seizures, enforcement proceedings, or legal restrictions.
Common Mistakes in Factoring Transactions
- Failure to notify the debtor;
- Incomplete or incorrect documentation confirming the debt;
- Assignment of claims that cannot legally be factored (e.g., alimony or employment-related payments);
- Unclear repayment terms in the event of the debtor’s refusal to pay.
The Role of a Lawyer in Factoring Transactions
A lawyer can assist with:
- Conducting legal due diligence of documents;
- Drafting a secure and legally compliant agreement;
- Resolving disputes with debtors or factors;
- Supporting assignment transactions during litigation.
Factoring is an effective tool for improving cash flow, but only when properly structured and supported by thorough due diligence. Involving experienced legal professionals helps minimize risks and protect business interests.
Specialists from the Ukrainian Bar and Real Estate Association can help you:
- Prepare a factoring agreement;
- Conduct legal verification of counterparties;
- Support the transaction from start to full execution.
Do not take unnecessary risks — work with professionals.
