Re:factor Risk Management System

Selling on credit terms is always associated with risks. From the very beginning, a supplier bears a risk of the buyer non-payment or late payment that may lead to its own inability to fulfil the obligations due to cash-flow shortage.

Running a sophisticated p2p factoring platform is also not free of risks. The first step for their mitigation is building an awareness of their existence and scope. With this article we begin an overview of various types of risks such as liquidity, market, legal and compliance, reputational and corporate governance risks. Today we are going to concentrate on those types of risks that most commonly threaten life and prosperity of P2P lending platforms.

Part I

Credit and operational risks

The operational risk implies the risk of supplier (receivables seller) fraud and dilutions that eventually lead a receivable value to decrease in value. The best known type of supplier fraud is assignment of fake receivables against financing. Dilution may be caused by multiple reasons such as a trade dispute between supplier or be a result of consumer rebate programme.

Re:factor plans to implement a set of risk management procedures to mitigate these risks.

A multilevel counterparty assessment and analysis system will include preventive inspection and ongoing monitoring of suppliers’ and buyers’ financial standing, reputation in the market, shareholding and organizational structures, corporate management system, litigations, country and sectoral particulars, trading relations status, etc. The first assessment procedures to avoid unreliable suppliers will be undertaken at the very early stage of clients interaction with the platform.

The majority of other receivables trading platforms rely on analysis of receivables sellers, not buyers. Most often, they do a basic financial analysis or even a simple background check to make sure a seller is compliant with basic eligibility criterion. Such an approach creates obstacles both for factor’s and suppliers’ business: not being able to see a full picture of a supplier growing business, such factors limit their analysis only to historic data and set credit limits that can’t satisfy new business requirements. Moreover, in such model a receivables marketplace may put investors at an additional risk in case of disputes between sellers and buyers: in such case, sellers could refuse to repay a disputed amount to investors.

Re:factor will analyse buyers’ businesses and set credit limits on them, not on suppliers. Moreover, re:factor will take into account so-called buyers-suppliers “links”. In such model of work, a seller will be able to enjoy as much funding and bad debt protection on the platform as a re:factor’s risk manager will approve for its buyers. Investors will subscribe to the preset buyer limits, thus, they will be protected from excessive credit and operational risks.

Such a ‘deep’ approach to risk analysis will enable re:factor to offer non-recourse factoring to differentiate itself from competitors. Thanks to this service, suppliers of goods will have an option to get a protection against buyers’ non-payment along with traditional factoring funding, On the other hand, p2p investors will get an option to earn more accepting this risk. Moreover, non-recourse receivables purchase will grant suppliers additional advantage — off balance sheet treatment. Suppliers will reflect actual cash instead of debts in their financial statements, and that makes them more attractive for potential investors and creditors. Thus, sellers will enjoy three benefits on re:factor’s platform instead of one.

Implementation of internal and field audit procedures will reveal mismatches in the counterparties’ financial statements and eliminate attempts to defraud the platform and p2p investors.

An electronic data monitoring system will automatically monitor large data sets on details of receivables assignment and payment. The system will detect data anomalies like untypical growth of volumes or unusually big numberof deliveries stating the same price to identify suspicious operations.

Receivables reconciliation with buyers will be used as an instrument to protect investments against possible seller’s fraud. Randomly or/and systematically contacting the buyers, re:factor officers will verify outstanding invoices to detect “air invoices” (fake invoices).

Covenants will limit possible risk exposure on buyers, specific regions and countries, industries, types of legal entities, etc.

Supplier participation in credit risk is a typical solution for protecting investors interests. Re:factor will implement the so-called factoring advance rate that will vary from 70% to 90% of the receivables value assigned for finance/purchase. When a seller has a skin in the game, it generally becomes more selective and cautious when extending trade credit to buyers thus reducing potential risks for investors.

Re:factor may establish an insurance fund where investors could deposit fractions of receivables trading amounts to fully or partly cover their potential losses.

A credit insurance may be used standalone or in combination with the platform’s insurance fund. There are a few global credit insurers conducting business operations in the platform’s focus countries. Re:factor considers attracting one or some of them to protect investments in trade receivables against buyers’ non-payments.

All the described measures are aimed to protect investments on re:factor’s platform from losses arising from credit and operational risks. Though these types of risks can be deemed the most dangerous, there are still a few more risks to be put under control to secure long time sustainable development of the platform…

… to be continued