Factoring Companies Guidebook
Price Protection
Definition
Where a Client/Prospect is contractually bound to offer unit cost reductions on entire contract volumes.
Concerns
We may already have accepted assignment of invoices at a price, which is subsequently adjusted downwards due to price protection. This will lead to the subsequent issue of credit notes by the Client or the customer taking debit notes. If the product in question is the Client's major line, this will extend through the majority of the invoices, not just the odd item. Similarly if the customer concerned represents High Involvement, this may wipe out our margin of security.
Identification
Review the terms and conditions of the Client, Suppliers and Customers.
Review credit notes, customer debit notes and remittance advices for any indications of price adjustments.
Treatment
Identify the potential level of security erosion (dilution) and establish a reserve account or reduce the PPF to control the position.
