Eight Risks to manage when Buying Trade Receivables

Profit, loss and risk crossword

Michael J. Clain is a lawyer with Windels Marx Lane & Mittendorf, LLP and works in their financial services practice.

One way to compare receivables financing structures is to analyze how – and how well – they handle the transaction risks that keep lenders awake at night.

Any lender who looks at supplier receivables as its principal means of repayment is concerned with 8 types of risks:

  1. Supplier fraud risk – the risk that the PO or invoice presented to the lender for financing may be fake or duplicative or may have been altered;
  2. Receivable title risk – the risk that the supplier may have already assigned or pledged the receivable to another financial institution;
  3. Receivable transfer risk – the risk that applicable law may not allow the lender to take good and marketable title to the receivable, free and clear of third-party claims, or that it may require the lender to take actions it was not aware it was required to take;
  4. Dispute risk – the risk that the buyer may claim that the goods or services provided by the supplier did not satisfy the requirements of the PO; this is a broad term that covers a number of different risks and possible claims against third parties, but our analysis doesn’t necessitate that level of granularity;
  5. Discount risk – the risk that the buyer won’t pay the full amount of the invoice for reasons other than the supplier’s performance in connection with the transaction at hand – the buyer may, for instance, take discounts for supplier nonperformance of prior transactions, may take discounts in the ordinary course of its business (some large retailers for instance are known to return to their suppliers goods that don’t sell) or may hold back a portion of the payment as retainage (standard in the construction industry, for instance);
  6. Payment delay risk – the risk that the buyer won’t pay in a timely fashion;
  7. Payment direction risk – the risk that the buyer will make the payment to the supplier or some other party instead of the lender; and
  8. Buyer credit risk – the risk that the buyer won’t pay due to financial inability.

 

In future posts,  we will discuss how different receivables financing structures handle these risks.  Comparing them on their ability to deal with lenders’ concerns will give us a good sense of their growth prospects and limitations – and maybe in the process give us a glimpse of the future of trade financing.

Voices (2)

  1. Tony Brown:

    In addition to Michael’s list, for receivables relating to cross-border trade the following risks are also relevant:
    1. Foreign exchange — currency fluctuation as well as overseas currency inconvertibility
    2. Regulations or government decrees in the importer’s country that prohibit importation of the goods or settlement of the receivable
    3. Repudiation of the purchase contract by a public sector buyer
    These and some of the risks listed by Michael can be mitigated through the use of credit and political risk insurance.

  2. renias pasipanodya:

    I would like to receive more publications on Trade financing

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