Those of you who came across the Guarantee Fund have probably wondered why in France (and some other countries) Factors are using a dedicated account to book Reserves and Retentions.
This is comes from a specific legal framework: The Civil Code written under Napoleon (that he has spread across Europe and Northern Africa during his “expansion”). The Guarantee Fund is a cash pledge that allows the Factoring company to have additional security in case of the Client's default.
Legally, the Factor can use this Guarantee Fund to compensate for any losses that the Client cannot repay. This is particularly useful in case of Client's insolvency, as it is admitted by any court that the Guarantee Funds belong to the Factor until the Funds in Use have been fully repaid.
In summary, the Guarantee Funds are booked with dedicated accounting transactions in a separate account, as an "official" statement of the Finance Provider's security.
There are two important aspects of the Guarantee Fund that you should know about:
1-Guarantee Fund impacts the Funds in Use. In other words, even if the Client doesn't receive the advance for the invoices, they pay interest on this amount (clever French people!!). Of course, clients have complained about this, so there is an option in Lendscape to set the % of the Guarantee Fund that will be interest free.
2-As the Guarantee Fund impacts the funds in use, French Finance Providers usually use an advance rate of 100% (not so clever French people, you would say!!). Actually, the result is the same as if they finance 100% of 90%.
Here is an example of daily operations related to Guarantee Fund for you to understand the practicalities:
A company working with a French Factor will negotiate the Guarantee Fund rate as well as a Min/Maximum amount. With a Turnover of €700,000 and an average Sales Ledger balance of €60,000, the Factor will wish to have a GF of €6,000 (i.e. 10% of the Sales Ledger balance). The Factor would probably set a minimum amount.
For a new client, to make the impact of building the Guarantee Fund less severe, there can be a "build stage" where just a percentage of the new invoices is transferred to the Guarantee Fund (e.g. 10%). As a result, they will finance 90% of first Schedules/invoices to credit the GF until the €6,000 has been reached. Once the GF has reached the min./max. amount, the Client will receive 100% of the subsequent invoices. The actual Guarantee Fund is kept in step with the "contractual" Guarantee Fund via debit/credit adjustments, transferring amounts to and from the fund such that its balance meets the contractual terms (in our example, 10% of the SL balance).
Here are a few more Guarantee Fund options:
- It can be debited/credited automatically (please check the option 0002 of the condition type to define when these bookings will occur).
- The Factor can set a different GF rate during the building stage to speed up or slow down the reaching of the min./max. amount.
- The rest of the options are self-explanatory
A final word about the Guarantee Fund, it may be pledged to the Client's home bank as an additional security for them. This means that if some funds are left after the Factor has been fully repaid, it is deemed to be paid to the pledgee.