Evaluating a model for default risk in non-recourse factoring

Abstract

Financial institutions are increasingly trying to improve their services through factoring, where a specialized firm purchases from its clients the trade debts or accounts receivables arising from the sales of goods or the provision of services to trade customers. As total factoring‘s volume grows rapidly and multiple enterprises and corporations use it as an important source of financing (Factors Chain International, 2009), financial organisations have to use control mechanisms to manage and check their clients and associated risks. While trying to measure risk in factoring, we should not only focus on credit risk, but also on ceding and debtor risk (default risk). However, the research that has been published in this area remains limited and to the best of my knowledge, there is no published model that can support the measurement and management of default risk in non-recourse factoring. Nevertheless, a model for default risk in non-recourse factoring has yet to be assessed, leaving scope for timeliness and novel research. In this dissertation, a model for default risk in non-recourse factoring is introduced as an extension to the normative literature on factoring, which has not paid much attention on risk factors‘ management. In doing so, the author presents and analyses the indicators that must be considered to assess default risk in non-recourse factoring.