Finance Monthly March 2019 Edition

38 www.finance-monthly.com ASK THE EXPERT - LENDING Risk management is a constant challenge for all financial institutions. It is particularly tasking in asset-based lending and invoice factoring due to the multiplicity of risks which banks and other financial firms that provide this service face. The repercussions of loose risk management include fraud, commercial default, bankruptcy, operational error, and financial penalties stemming from a weak compliance environment, to name check just a few. AQ & purchases, loyalty programmes etc. There are payment risks too, such as payment delay risk – the risk that the buyer won’t pay in a timely fashion; and payment direction risk – the risk that the buyer will make the payment to the supplier or some other party instead of the lender. Invest in the best technology Today the starting point of any effective risk management is technology. Financial institutions need to implement systems that can detect deteriorating profiles or fraudulent client activity significantly earlier than manual processes to mitigate potential losses. Gathering daily risk metrics to track trends and changes as they occur is ideal as it allows risk managers to constantly monitor client risk and instantly detect adverse trends. This also helps lenders to take a risk-based approach to portfolio management and target the ‘highest isk management in the asset-based lending area is a constantly evolving discipline, says Kevin Day, CEO of HPD Software. There are many and varied views as to what constitutes best practice to minimise losses. Key areas worth investing in include the best technology; ensuring cybersecurity systems are up-to-date; constantly monitoring data flows and credit risk while recognising that different aspects of risk management take priority in different countries and jurisdictions. One of the biggest risks of all is people, so ensuring education and skills development plays a central role is just as important as bolstering technological protection. The sheer range of risks is daunting. They include buyer credit risk – the risk that the buyer won’t pay due to financial inability; 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; receivable title risk – the risk that the supplier may have already assigned or pledged the receivable to another financial institution; and receivable transfer risk – the risk that applicable law may not allow the lender to take good and marketable title to the receivable. Another risk lenders must deal with is understanding whether the buyer can settle the invoice fully and on time. Non-performance on the part of the supplier leads to commercial disputes – the risk that the buyer may claim that the goods or services provided by the supplier did not satisfy the requirements of the PO and refuse to pay (legitimately or otherwise). Another common issue is dilution risk – the risk that the buyer will not pay the full amount of the invoice. This may be due to credit notes issued to resolve commercial disputes, not necessarily related to the supplier’s performance in connection with the transaction at hand, or discounts taken for early settlement, volume KEVIN DAY CEO of HPD Software KEY FACTORS IN IMPLEMENTING EFFECTIVE RISK MANAGEMENT IN ASSET-BASED FINANCE R