insurance is a compelling and affordable alternative to factoring – the selling of accounts receivable to a third party. Credit insurance can strengthen both cash flow and strategic decision making.
Insuring accounts receivable with credit insurance:
The contrast with factoring could not be greater. When your company sells its accounts receivable to a factor:
Credit Insurance vs. Factoring: The Bottom Line
Let’s look at a real-world example of the choice between credit insurance and factoring.
A company with $5 million in annual sales transactions choosing between purchasing credit insurance and selling its accounts receivable to a factor will see a significant difference in costs.
The Cost of Credit Insurance
Credit insurance covering $5 million in accounts receivable generally conservatively costs may cost between 0.25% to 0.50% of the insured amount, or between $12,500 and $25,000.This ensures that cash flow remains uninterrupted – if the invoice is not paid, the credit insurer covers the loss.
Credit insurance costs range from:
$5,000,000 x 0.25%, or $12,500
$5,000,000 x 0.50%, or $25,000
The Cost of Factoring
The fees involved in selling $5 million in accounts receivable to a factor are generally one percent of the total amount, or $50,000.
This amount does not provide any payment guarantees for the sold accounts receivable and such guarantees are not always available.
If the factor does offer payment guarantees, the cost of those guarantees is another one percent of the value of those accounts receivable. This adds another $50,000 to the cost of factoring and brings to the total cost with payment guarantees to $100,000.
$5 million in accounts receivable x 1.0%, or $50,000
Factoring with payment guarantees:
$5 million in accounts receivable x 2.0%, or $100,000
The numbers tell the story. Leverage credit insurance for the sake of your business to preserve your bottom line and maintain your your customer relationshipss.