Factoring is a useful tool to improve liquidity and receivables management for companies. However, like any financial instrument, it comes with certain risks and limitations. In this article we will look at the risks and limitations of factoring under New Zealand law.
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.