On December 17, 2020, after more than 10 years since the Central Bank of Paraguay issued a resolution regulating factoring for financial entities in 2009 (Res. No. 1 of July 1, 2009, Act No. 38), the new Law No. 6542, “ON FACTORING, EXCHANGE INVOICES, AND THE ELECTRONIC SYSTEM FOR GUARANTEED OPERATIONS,” will come into force in Paraguay. The previous resolution, due to flaws in its design, limitations, and lack of enforceability, failed to generate a real alternative that would encourage its widespread use in the Paraguayan market.
From that date, the invoice, one of the most widely used commercial and financial instruments, will be endowed with legal regulation and protection, which will eliminate the difficulties in its use, especially at the time of judicial debt collection.
It is well known that “factoring” is a modern alternative for obtaining working capital, through which companies can turn their accounts receivable into cash.
This financial tool, which is increasingly used worldwide, is expected to be efficient in providing credit relief to many companies, especially small and medium-sized ones, particularly in these times of economic and financial difficulty in which the COVID-19 pandemic has put many companies in our country on the ropes.
The ease with which factoring can provide liquidity to companies that sell on credit, freeing them from costly and cumbersome collection procedures, while also allowing for greater flexibility in their credits and converting their short-term sales (with maturities no longer than 90 or 180 days) into cash sales, could be an incentive in this difficult time.
The tool creates new credit possibilities, since in many cases the traditional way of financing working capital through credit institutions does not allow them to have this possibility, due to the weaknesses of their financial statements and available collateral.
In addition to legislating on the factoring contract and the form of contracts, the new Law No. 6542 establishes a clear conceptualization of the “exchange invoice,” its requirements, executive force, and certain rules that govern its operation.
And as an innovation in automated systems in support of financial transactions, the creation of the Electronic System for Guaranteed Operations (SEOG) is established. This will be a remote access database where notices of ordinary credit assignments not contained in credit instruments, made by virtue of a brokerage contract, will be registered. The Central Bank of Paraguay will be the administering entity with the power to regulate everything related to the system.
Other advantages that factoring and the rules and system created by Law No. 6542 are expected to provide to Paraguayan companies are:
- It will provide companies with the method to adjust their objectives and reduce the cost of setting up a collections department that, in addition to good customer service, achieves a good result when it comes to facing the payment for services or works.
- As another short-term financing option, it will significantly help the business owner improve their financial coffers and achieve an improvement in operational performance.
- It will provide agility in obtaining resources, managing to cover cash flows.
- It will allow the business owner to anticipate a large part of their income and thus meet urgent obligations at a low and convenient cost.
- It will enable client companies of credit institutions to obtain financial resources with greater financial backing, reducing the complexity of credit processes.
- It will give the business owner a greater margin in financial flows, allowing for more flexible decisions on this type of financing.
Factoring will surely begin to be accepted as another part of commercial life in our country, and although it will be necessary to carry out a complete dissemination of the concept by business unions and associations and the Central Bank to achieve its full use, it is expected that in a reasonable period of time it will occupy a significant place in the economic context of Paraguay.
It will be a great contribution to Paraguay’s business credit system for the Central Bank to have the SEOG ready, in a timely manner, so that when Law No. 6542 comes into force, the system is operational.
With this, all the alternatives that factoring offers can be available to companies, even more so, as has been said, coming out of COVID-19, which has caused financial and economic difficulties for many companies, especially small and medium-sized ones, and which will require fresh and genuine credits to provide relief to their weakened finances and move towards recovery.