Risks
The most important risks of a factor are:
- Counter party credit risk related to clients and risk covered debtors. Risk covered debtors can be reinsured, which limit the risks of a factor. Trade receivables are a fairly low risk asset due to their short duration.
- External fraud by clients: fake invoicing, mis-directed payments, pre-invoicing, not assigned credit notes, etc. A fraud insurance policy and subjecting the client to audit could limit the risks.
- Legal, compliance and tax risks: large number of applicable laws and regulations in different countries.
- Operational risks, such as contractual disputes.
- Uniform Commercial Code (UCC-1) securing rights to assets.
- IRS liens associated with payroll taxes etc.
- ICT risks: complicated, integrated factoring system, extensive data exchange with client.
Read more about this topic: Factoring (finance)
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