Article “Factoring: what is worth to know?” by attorney Lauri Talumäe



It is too early to say whether the economic crisis of 2020 has come to an end, but evidently last year was exhausting for businesses. The decline in turnover and the persistence of labour costs consumed the working capital of numerous companies. One of the most convenient methods to release more working capital is factoring.

In 2021, there are definitely more people interested in factoring than before. For example, in the five years preceding the last economic crisis, domestic factoring turnover in Estonia increased by an average of 2.25% per year. In the five years following the economic crisis, it increased by an average of 26% per year. Therefore, we briefly explain what factoring is about and what to consider in it.

What is it?

 The simplest and most common factoring is that a company sells its claim against some customer. In other words, the customer would have to pay, for example, the company’s invoice in the amount of EUR 10,000 after 60 days, but instead of waiting that long the company would transfer it for EUR 9,900 to a financier who will wait for the payment. This factoring model is quite common and is often accompanied by the so-called buy-back obligation. In other words, if the customer fails to pay the invoice on time or within a certain period, the company must repurchase it with the price of the original value and added interest.

In addition to the factoring solution above, there are other options. For example, there is no repurchase obligation or instead the company is granted credit and the customers undertake to pay all invoices directly to the factoring service provider who then collects and accounts for the invoices itself. It is also possible that no credit is granted, but the factoring service provider simply buys all the company’s invoices. From a legal point of view, it is important that the claim has arisen in the economic or professional activity of the entrepreneur as a result of the provision of services or the sale of an object – claims for damages, etc. cannot be factored.

The main advantage of factoring is that the company does not have to wait for long payment periods. In Estonia, the average payment term for invoices is about 45 days, which means that the entrepreneur must have sufficient financial resources to pay salaries, purchase raw materials, pay rent and service costs, etc. during the waiting period. In Estonia, factoring is quite common – in 2018, almost 14% of the transactions underlying Estonian GDP were financed through factoring.

Notification of assignment of claim

The main part of factoring is that the entrepreneur assigns its claim to a third party, to whom the customer undertakes to pay it. However, there are some nuances. The assignment of a claim may take place in such a manner that the customer is notified or not. In the first case, the entrepreneur or the factoring provider informs the customer that the invoice issued must be paid directly to the factoring provider. In the second case, there is no notification and often the bank account of the factoring provider is written on the invoice instead of the company’s account number.

Generally, the assignor of the claim is required to notify the debtor (its client) of the assignment of the claim. Notification of the assignment of a claim entails a specific obligation for the client – in any case, the invoice must be paid to the person to whom the claim was assigned, the so-called new creditor. If the customer has been notified of the assignment of the claim, but the customer still pays it to the original creditor, the new creditor may also require the customer to pay the invoice. This would be the case even if it meant double payment of one invoice for the customer. Basically, the customer is considered to have paid the bill to the wrong person and this does not release the customer from the obligations to the new creditor.

The main point for the client is that once the invoice or claim has been assigned, the original creditor is no longer entitled to give instructions on when or where to pay the invoice. If the original creditor at some point appears with a request for the assigned invoice to be paid directly to him, it would always be wise to contact the factoring provider and ask for confirmation that the claim has been assigned back to the original creditor. Otherwise, the customer may fall victim and make double payment for the invoice. Of course, it is always possible to demand a refund of one payment from the person to whom the unjustified payment was made.

Transfer of other rights

Generally, in the case of assignment of a claim, the guarantees and additional obligations related to the claim also accompany it. In the case of accompanying guarantees, the easiest example is a surety. In other words, if someone has guaranteed the performance of an obligation and the obligation is not performed, then the new creditor also has the right to demand performance of the obligation from the guarantor. However, the guarantor (or other person providing security) or the debtor and the original creditor may also agree that the security (such as a surety obligation) will not accompany the assignment and such an agreement is permissible and must be considered by the new creditor.

It is important to know that the right to charge fine for delay, interest and contractual penalties also transfers to the new creditor. This must certainly be kept in mind if there is a delay in paying the invoice and the original creditor asks the customer for an interest or a contractual penalty. If the invoice was assigned to the factoring provider, they have the right to request the payment and by paying to the original creditor, the customer may again risk double payment.


It is possible to offset a claim even if it belongs to a new creditor, such as a factoring provider, but with certain restrictions. If the customer has already been informed that the claim has been assigned to a new creditor, he cannot set it off against a claim which is subsequently acquired from someone else. This means, in particular, that the customer cannot use for set-off a claim which the original creditor should have initially paid to a third party and has acquired after learning of the assignment.

Also, if the customer is aware that the claim against him has been assigned, he cannot offset the claim assigned to the new creditor against a claim that becomes receivable later. For example, if the due date of the assigned invoice is 01.02.2021, it cannot be set off against the invoice with the due date of 02.02.2021, provided that the customer knew about the assignment of the invoice with the due date of 01.02.2021. It is also important to remember when the claims become due. If due date has not been agreed for in mutual agreements, the claim becomes due 30 days after the issue of an invoice, the delivery or review of the goods or services.

Lauri Talumäe
Attorney of Law Firm LINDEBERG