Risks of factoring

• Credit default risk

One of the main risks of factoring is the risk of credit default of debtors. If the debtor fails to pay its debts, the factoring company may incur losses.

• Liquidity risk

If the liquidity needs are not correctly forecasted, the company may find itself in a predicament where the factoring company reduces the amount of funding.

• The risk of not being able to obtain financing

Some companies, especially small businesses, may find it difficult to obtain factoring financing due to their financial situation or risky accounts receivable base.

The limitations of factoring in New Zealand are

• Credit rating of debtors

Factoring companies may impose restrictions on debtors with poor credit ratings or unfavorable payment histories, which can limit a company’s access to factoring finance.

• Types of receivables

Certain types of receivables may be excluded from factoring transactions due to their complexity or high risk, such as receivables under long-term contracts.

• Contracts and obligations

Restrictions and covenants set forth in factoring contracts may limit a company’s freedom of action with respect to its accounts receivable.

Compliance with legislation

Factoring companies in New Zealand are required to comply with legislation that regulates financial services and customer protection. This includes the Financial Services Act, the Data Protection Act, and the Competition and Consumer Law. Compliance with the laws helps to minimize risk and ensure transparency and accountability in factoring activities.

Factoring is an important tool for managing receivables for companies in New Zealand. However, before applying factoring, companies should carefully assess the risks and limitations of this tool and ensure compliance with the laws of the country. With proper planning and legal compliance, factoring can be an effective means of improving the financial situation of companies in New Zealand.

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Contracts in factoring

• Factoring Agreement

This is the basic contract between the factoring company and the client (the seller of the receivables). It defines the rights and obligations of each party, discount percentages, rates, fees, commissions and other important terms.

• Contract with receivables

This document is between the factoring company and the client’s debtors. It defines that the debtors are obliged to pay the debt directly to the factoring company, and also establishes the terms and conditions of payment.

• Representation Agreement

When the factoring company acts as the client’s representative, this document establishes the rights and authority of the factoring company to collect debts from debtors.

Documentation in factoring

• Invoices

This is the key document that confirms the client’s accounts receivable to the factoring company. Invoices must be accurate and meet the general requirements of correctness and completeness of documentation.

• Debt Documents

The factoring company usually requires the client to provide additional documents confirming the receivables, such as contracts, orders, delivery documents and other documents confirming the performance of services or delivery of goods.

Compliance with regulations and legislation

Compliance with regulations and legislation in factoring is integral to successful operations. In New Zealand, factoring companies are required to comply with laws and regulations governing financial services and data protection, including:

• The Financial Services Act

This sets out the licensing requirements for financial companies and protects the rights of customers.

• Data Protection Act

This law regulates the collection, storage and use of customers’ personal data, including factoring transactions.

• Competition and Consumer Law

It ensures fair and transparent operations of factoring companies and protects the rights of clients.

Contracts and documentation are integral to a successful factoring business in New Zealand. Getting contracts right and providing accurate documentation ensures transparency and trust between the parties to the transaction. It is also important to comply with regulations and legislation to ensure that factoring transactions are legal and efficient, contributing to the success of companies in New Zealand.

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A convenient way of financing supplies

In order to run a full-fledged business (i.e. to pay salaries to staff, pay taxes and purchase raw materials without delays), you need money. If the proceeds for sold goods arrive irregularly or late, there is a shortage of working capital. Sometimes the delay is provided by the supplier himself, who wants to attract customers. But in any of these cases the same problem arises – there are not enough funds for your own needs.

Instead of obtaining a loan, a factoring agreement can be concluded. As a result, the relationship involves:

• the seller himself;
• the factor – usually a bank, but there is also a specialized factoring firm;
• the buyer – participates in the transaction indirectly, in some cases is not informed about the use of this financial instrument at all, simply pays the factor instead of the supplier.

What most often threatens the normal course of factoring relations?

Lack of due payment

In such a situation a bank that has not received funds from the buyer or a supplier, if the factoring firm refuses to transfer the agreed amount after confirmation of shipment of products, may suffer. The reasons are as follows:

• financial insolvency (pre-bankruptcy) of the paying company;

• legal problems – for example, litigation and restrictions on accounts or other property, actions of law enforcement, tax, customs and other state supervisory authorities;
• inherently unscrupulous business conduct – document forgery, creation of a one-day company, “gray” supply schemes.

Violation of terms

Delayed payment for goods or untimely return of financing by the supplier has a negative impact on the solvency of the factoring company. And this is a risk of liquidity reduction and malfunctioning. If cash gaps turn out to be significant, they will cause problems for other clients along the chain.

What should be taken into account additionally?

Macro-financial risks. For example, a bank’s precarious position may result from difficulties in the economy. In turn, this will not allow the credit organization to act as a factor and allocate enough money to all those who need financial support. And if there is a shortage of working capital, the situation will rapidly deteriorate in many companies, especially those dependent on borrowed capital.

It is important to anticipate the risks of political upheavals, economic reforms, and force majeure events in the world. These can lead to the following problems:

• revocation of the counterparty’s license;
• moratorium on payments;
• sudden changes in the exchange rate (of importance in international cooperation);
• price hikes for the products involved in the factoring transaction (not all customers are able to pay an increased amount for the received goods);
• bankruptcy of the supplier or buyer;
• excessive increase of tax burden on factoring participants, etc.

What risks are borne by each party?

Supplier

The seller is the most interested in using factoring. Therefore, it is fair that it is he who has to bear the brunt of possible consequences. To show what and at what stages threatens the supplier, let’s describe the conclusion and realization of an ordinary economic transaction with factoring support:

• The seller sends the products to its contractual counterparty and receives the supporting documents from it.
• Immediately after that, the supplier presents the delivery notes, certificates, invoices and other papers to the factoring firm, which transfers money to him on account of future payment from the customer (minus remuneration).
• The customer is given payment details for payment for the goods – the funds must be received in favor of the bank.
• The buyer transfers the payment – the obligations of all parties are fulfilled.

The “weakest” point in this algorithm is the repayment of the debt by the customer. In practice, factoring with recourse is most often encountered. This means that in the event of refusal or objective impossibility of settlements under the contract, the bank collects the funds previously transferred from the supplier. And sometimes it is necessary to return not just the amount received, but the entire payment provided for under the transaction with the buyer. In addition, the terms and conditions of some factoring agreements include a provision on penalties for unfair partnership. The seller will be able to cover the losses, at least partially, only through the court – and this means additional expenses, time and far from 100% chances of success.

Thus, the supplier is very dependent on the reliability and solvency of his business partner. He, not the bank, will bear full responsibility for the failure of the deal.

There are also associated risks associated with the need to reclaim the debt. This will first be handled by the factoring firm. Management of clients’ accounts receivable is one of the services included in the concept of factoring.

And in this case two unfavorable scenarios are possible:

• Attempts to get the due payment from the customer may be too assertive. Such pressure will present the client in an unfavorable light and discourage further cooperation with him;

The “weakest” point in this algorithm is the repayment of the debt by the customer. In practice, factoring with recourse is most often encountered. This means that in the event of refusal or objective impossibility of settlements under the contract, the bank collects the funds previously transferred from the supplier. And sometimes it is necessary to return not just the amount received, but the entire payment provided for under the transaction with the buyer. In addition, the terms and conditions of some factoring agreements include a provision on penalties for unfair partnership. The seller will be able to cover the losses, at least partially, only through the court – and this means additional expenses, time and far from 100% chances of success.

Thus, the supplier is very dependent on the reliability and solvency of his business partner. He, not the bank, will bear full responsibility for the failure of the deal.

There are also associated risks associated with the need to reclaim the debt. This will first be handled by the factoring firm. Management of clients’ accounts receivable is one of the services included in the concept of factoring.

Factoring is definitely a promising and profitable, but also a risky way of financing. However, it is quite realistic to avoid problems. It is necessary to professionally assess future partners and the terms of cooperation.

The post How to Eliminate Risk: Factoring Can Be Both Profitable and Safe appeared first on InvoiceNZ.

Data protection in factoring

Compliance with data protection laws

Factoring companies in New Zealand are required to comply with the Privacy Act. This Act regulates the collection, use, storage and disclosure of customers’ personal information, and provides rights and opportunities to control and secure data.

Confidentiality of client data

Factoring companies must ensure strict confidentiality of client data, preventing unauthorized access and disclosure. Access to the data is usually granted only to the relevant personnel with appropriate authorization.

Security of information systems

Factoring companies must take measures to secure their information systems to prevent hacker attacks, data breaches or other security breaches.

Privacy in factoring

Transparency and consent

Factoring companies are obliged to provide clients with clear information on how their data will be used and processed. It is also necessary to obtain the client’s explicit consent to the processing and use of their data.

Restrictions on the use of data

Companies must only use client data within the agreed purposes, not disclosing it to third parties without the client’s consent, unless required by law.

Right of access and rectification

Customers have the right to access their personal data and the right to have it corrected if it is incorrect or out of date.

Staff training and compliance

To ensure data protection and client privacy, factoring companies are required to train their staff on data processing and security regulations. Companies must also regularly audit their information systems and procedures to ensure they are compliant with legislation and security standards.

Data protection and privacy are critical aspects for factoring companies in New Zealand. Compliance with data protection laws, ensuring the confidentiality and security of customer information, and adhering to privacy principles help build customer trust and confidence, which is the foundation of a successful factoring business.

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How to make the director repay the debts of the company?

Parties to factoring. There are three parties involved in factoring:

• The client.
• Debtor.
• Financial agent.

A financial agent is a person who provides the client with services to support monetary claims. Sometimes a financial agent is called a factor – these are synonyms. Any commercial organization, including banks, may be a financial agent.

The client is a person who assigns monetary claims to the factor and pays for its services.

What is an agency agreement

Previously, factoring was understood as the purchase and sale of the right to demand payment for goods sold, services rendered or work performed. But such a definition was similar to another contract – assignment of a claim. Besides, it did not correspond to international practice, according to which factoring is always a complex of services.

Now factoring is a complex of services on repayment of debt, which the financial agent renders for assignment of this debt.

A set of such services is assembled like a sandwich. There is a basic element, a kind of sandwich bun: the client concedes monetary claims to the factor and pays for his services. There is a filling, which the parties choose: at least two services from the following list:

• Financing, including in the form of a loan or pre-payment.
• Settlement of the client’s claims against third parties.
• Realization of claims against debtors, such as demanding payment of a debt, receiving payments from debtors.
• Checking, controlling or collecting collateral, dealing with guarantors or insurance companies.

If desired, the parties can add “sprinkles and gravy” – additional services. For example, bookkeeping, processing of debtor registers, inventory of receivables, insurance, etc.

Differences from an assignment. Cession is simply an assignment of a claim. In a cession, the one who has the right to demand something transfers that right to another person. A cession agreement is often used to formalize the sale of debts.

Cession is a mandatory element of factoring: the client assigns monetary claims to the factor for services rendered. But factoring is not limited to cession. In addition, it includes elements of other contracts: loan, sale and purchase, provision of services.

MFI: what it is and how it works

In cession, both monetary and non-monetary claims can be assigned, for example, the right to take goods from the seller’s warehouse can be assigned. In factoring, on the other hand, only the assignment of claims to pay money is allowed.

Differences from forfeiting. Factoring is used for short-term financing. The average term of factoring is 90 days. It is risky to provide money for a long period of time: the debtor may not be able to pay his debt. To minimize this risk, sometimes another type of financing against assignment of monetary claim – forfeiting – is used.

How to conclude a contract for the provision of services

Forfeiting is most often used in foreign trade export transactions.

As in factoring, forfeiting has three parties:

• Creditor – one who has a monetary claim against the debtor.
• Debtor – one who is obliged to pay the debt.
• The forfeiter is the one who pays the creditor’s claim for the debtor.

But the transaction is structured differently. The debtor pays the creditor with a promissory note or issues a letter of credit in the creditor’s name. The forfait pays the creditor for the debtor, and in return, the creditor gives him the promissory note or re-issues a letter of credit in his name. The forfait may then wait until the due date or sell the promissory note or reissue the letter of credit to another holder without waiting for the due date.

What is a letter of credit

A bill of exchange and a letter of credit are unconditional obligations of a debtor to pay a certain person. The debtor is no longer owed by virtue of the fact that the creditor has rendered him some service, performed work or sold goods, but by virtue of the executed bill of exchange or letter of credit. The content and legality of the original contract between the creditor and the debtor should not concern the forfeiter.

In factoring, however, the factor must be convinced of the reality and economic feasibility of the debt sold to him. Therefore, in the framework of forfeiting, financing can be provided for a longer period of time – even for several years.

Sometimes forfeiting is considered a kind of factoring. But this is not the case, because forfeiting does not provide the creditor with debt recovery services.

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Regulation of factoring in New Zealand

Factoring in New Zealand does not fall under separate specialized legislation. Instead, it is governed by various general laws and regulations, including:

1. Competition and Consumer Law Act

This Act regulates the interaction between companies and their customers. It protects the rights of customers by setting requirements for factoring companies to operate fairly and transparently.

2. Data Protection Law

Factoring companies have access to sensitive financial data of their clients. The Data Protection Act obliges companies to comply with appropriate measures to ensure the security and confidentiality of this data.

3. Corporate law

Factoring companies must comply with the general rules and regulations set out in corporate law that relate to the formation and registration of companies in New Zealand.

Obligations of factoring companies

Factoring companies in New Zealand must comply with the following obligations:

1. Licensing and registration

Factoring companies must be properly licensed and registered under the financial services legislation.

2. Transparency and documentation

Companies are obliged to provide clear and understandable information about their services, tariffs, commissions and work rules to clients. The execution of legally correct contracts and documents is mandatory.

3. Data protection and confidentiality

Factoring companies must ensure security and confidentiality of clients’ data in accordance with the data protection law.

Factoring legislation in New Zealand provides a legal framework to regulate this financial instrument and protect the interests of all participants. Factoring companies must comply with the obligations and requirements set out in the legislation to ensure transparency, accountability and trust in the factoring market in New Zealand. With proper compliance with all legal rules and regulations, factoring can be a powerful tool to promote the growth and success of companies in this country.

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What is factoring?

Factoring is a financial transaction in which a company sells its outstanding invoices (accounts receivable) to a factoring company (the factor) at a discount. The factor provides term financing to the company by paying it a certain percentage of the total receivables. The factor then collects the money itself from the company’s debtors, thus giving the company instant access to money.

Legal aspects of factoring in New Zealand

Factoring legislation: Factoring in New Zealand is governed by various laws and acts. The lack of specialized factoring legislation makes it necessary to carefully research the applicable law and comply with all applicable rules and regulations.

Contracts and documentation: Drawing up contracts between the company and the factoring company is an integral part of the factoring transaction. Legally correct and complete contracts help avoid misunderstandings and disputes between the parties.

Data Protection: Factoring involves the exchange of sensitive information between the company, the factor and the debtors. Therefore, compliance with data protection laws is mandatory to protect the rights and interests of all parties involved.

Regulatory aspects of factoring in New Zealand

Factoring company licensing: Factoring companies must meet the requirements set by the regulators and obtain the appropriate license.

Financial Reporting: Factoring companies must comply with the rules of reporting and transparency of their activities to the regulatory authorities.

Protection of clients’ and debtors’ rights: Regulators ensure that factoring companies respect the rights and interests of clients and debtors to prevent abuse.

Factoring is a powerful tool to improve the financial situation of companies in New Zealand. However, legal and regulatory aspects must be carefully considered in order to successfully utilize this financial tool. Compliance with laws and regulations will help ensure that factoring transactions are transparent, responsible and sustainable, which will ultimately benefit both companies and factoring companies in New Zealand.

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