China's Ministry of Commerce (MOFCOM) issued a circular1 in June 2012 encouraging domestic and foreign investors with experience in the factoring business to establish specialized commercial factoring companies in the Tianjin Binhai New Area and the Shanghai Pudong New Area. By the end of 2012, three government entities in Shanghai had jointly issued measures to implement the MOFOM circular 2 (the Implementing Measures). The Implementing Measures, which came into effect on December 11, 2012, set out detailed requirements with respect to the establishment of commercial factoring companies in Shanghai. The key features of the Implementing Measures are as follows:.
Legal Form of Commercial Factors
- A "commercial factoring company" is required to be a limited liability company established by domestic and/or foreign investors in the form of a wholly owned company, an equity joint venture or a cooperative joint venture.
General Setup Requirements
- At least one of the investors in the commercial factoring company or an affiliate thereof must have a track record in the factoring business or a related business (this may include global trade, finance leasing, financing guarantee or small-scale lending).
- A commercial factoring company must have at least two senior management officers with three or more years of management experience in the finance industry.
- The investors must contribute a minimum registered capital amount of RMB50 million to set up the factoring company. The contribution of registered capital must be made in cash, and no less than 20 percent of the registered capital shall be paid upon the establishment of the commercial factoring company. The remaining 80 percent of the registered capital must be paid within two years from the establishment date. A foreign investor may make capital contributions using cash in any freely convertible currency or renminbi obtained offshore, or by way of onshore renminbi profits and income.
- The commercial factoring company cannot commingle its factoring business with any of its other businesses.
- The commercial factoring company must have sound internal control systems, including, without limitation, risk evaluation procedures, business operation guidelines and other relevant monitoring systems.
- To set up a foreign-invested commercial factoring company, the investor(s) must obtain regulatory approval from Pudong Commission of Foreign Trade and Economic Cooperation (COFTEC), and must register the company with the Shanghai Automotive Industry Corporation (SAIC) Pudong Branch.
Scope of Business
A commercial factoring company may engage in the following business activities:
- Export factoring (with the debtor of the assigned accounts receivable being outside China)
- Domestic factoring for domestic trade
- Consulting services with respect to commercial factoring
- Development of credit risk management systems
- Other related businesses approved by the relevant Chinese authority
A commercial factoring company is not permitted to engage in the following business activities:
- Taking deposits
- Granting loans
- Specializing in or, upon entrustment, carrying out debt collection or any related business which is not directly relevant to commercial factoring
- Making investments under an entrustment structure
- Other related activities prohibited by the relevant authorities
- The risk assets (i.e., the total assets of the company less cash, bank deposits and debt) of the commercial factoring company cannot exceed ten times of the total amount of its net assets.
- A commercial factoring company must engage a custodian bank that is a member of the global factoring organization.
- A commercial factoring company must register the assignment of accounts receivable with the Credit Information Center of the People's Bank of China.
- A commercial factoring company must file monthly reports to Pudong COFTEC and cause its custodian bank to file reports regarding the operation of the custodian funds once every six months to Pudong COFTEC.
The Pudong New Area Government is in the process of formulating rules regarding government subsidies to be granted to commercial factors, which may include tax rebates and tax subsidies for office rent and senior management personnel.
Factoring is a financial transaction whereby a business sells its unmatured accounts receivable to a third party bank or a specialized factoring company (called a factor) at a discount. Although variations often exist, in a typical factoring transaction, the factor provides financing to the seller of the accounts receivable in the form of a cash "advance," which may be up to 70 percent – 85 percent of the purchase price of the accounts receivable. The balance of the purchase price is then paid, net of the factor's discount fee (commission) and other charges, upon collection from the account client.