The rules could classify 15% to 20% of receivables for which factoring firms bear the risk as defaulted. Supply chain finance firms pay a company’s suppliers the value of their outstanding invoices minus a discount. The suppliers get their money faster while the lenders earn a relatively safe return when the invoice is paid.
Starting with 2021, the European Banking Authority will hold lenders in the region to a common definition of default after finding big differences in how they deal with one of the most fundamental issues in banking.
The EBA’s new framework states that receivables booked on a firm’s balance sheet should be considered technically past due after 30 days. That is a problem for supply chain finance firms because big companies often pay their bills late.
A lobby group has asked the EBA to extend the grace period for late payments to 90 days, saying it would reduce the impact on the financing firms by 75%.