Factoring insurance is an agreement with a third party company to purchase accounts receivables at a reduced amount of the face value of the invoives. These costs may range from 1% to 10%, based upon a variety of components. Some factoring services will assume the risk of non-payment of the invoices they purchase, while others do not.
When your company utilizes accounts receivable factoring:
Credit insurance is a compelling and affordable alternative to accounts receivable factoring. Credit insurance can strengthen both cash flow and strategic decision making.
Insuring accounts receivable with credit insurance:
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.
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 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
Read our CP Shades Case Study to learn more about the impact factoring could have on your business.
The numbers tell the story. Leverage credit insurance for the sake of your business to preserve your bottom line, protect your company from the risk of non-payment, and maintain your your customer relationships.