Factoring Companies Guidebook

A contractual obligation to warrant/guarantee the performance of goods or services over a contracted period of time to a definitive standard.

Concerns

Goods may not be paid for by the customer if the Client ceases trading and is therefore no longer in a position to honour its obligations. This would cause particular concern if the customer were the distributor of goods as opposed to the end user. It would neither be able to sell goods for the full market value with no guarantee attached, nor wish to expose itself to honouring any guarantee, through no longer having recourse to the Client (supplier of the guarantee).

Identification

Review the terms and conditions of sale and any sales literature and catalogues.

Make enquiries with the Client to ensure no more than standard 12 months guarantees or warranties are given with products. Review the nature of credit notes to establish whether they have been given in the past.

Treatment

Client is the Distributor:

The guarantee is usually offered on the back of the manufacturers guarantee and to the same terms which would not lead to security problems in the majority of cases.

Where the manufacturer is a significant supplier to the Client (>20% of the purchase ledger outstanding), a credit rating should be conducted on the supplier. If the credit worthiness of the supplier is a concern, which may affect their ability to support their warranty, consideration should be given to restricting finance to the Client's ledger.

Client is a manufacturer:

Where the customer is a distributor, then no debts should be accepted where an extended guarantee is given.

If the warranty exceeds 12 months the invoices may not be suitable for funding.

Where the customer is the end user then a review of the quality and reliability should be undertaken by examining the level of returns due to faults.

Legal opinion stated that in event that the extended warranty is taken out at the same time as the original sale or service contract, then to all intents and purposes the original contract includes the extended warranty and it is all consolidated to become one and the same. In the event that the Client is offering extended warranties on the expiry of the original warranty, where the original warranty is no longer than 12 months and then that warranty is completely separate and different from the original contract. As such it would not give any right of set-off which would affect the factored debt.