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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