On this page, we would like to elaborate the difference, advantages and costs of a credit insurance and factoring
A credit insurance as well as factoring are often mentioned together with debtor management. Although both look alike, and are part of the debtor management, they are two different disciplines. Factoring is a form of financing and a credit insurance is a kind of insuring. The advantages and reasons for taking out a factoring contract or a credit insurance are mostly different. To provide a complete image of what factoring and a credit insurance are, we will elaborate the difference further on this page.
Factoring as well as a credit insurance limits the risk of default and optimizes the cashflow. Therefore, it is often a either/or decision. Essentially, they both offer substantial advantages that could help you make a choice. To be able to make a well considered choice, it is important to have clear insights into the difference between a credit insurance and factoring.
A credit insurance is an important part within the debtor management. Another name for a credit insurance is; “a debtor insurance”. The insurance has been designed for companies who supply to their customers on credit. To offer them certainty that their realized turnover will indeed be achieved, they can take out a credit insurance. The credit insurance hedges the risk of default. If your debtors can not pay the outstanding invoices anymore, the credit insurer will pay for the invoices, conform the policy. A credit insurance offers, next to the payment of outstanding invoices, several other advantages/ a credit insurance offers a debt collection system, provided this is included into the policy. When taking out a credit insurance, the company can count on the knowledge, expertise and software of the credit insurer. Some credit insurers exist for almost 100 years already. In these 100 years, they managed to build an enormous database with information regarding industries, markets, countries and companies. When taking out a credit insurance, the company can utilize this up-to-date information. This way, current and new companies are checked for their creditworthiness, on which the company can anticipate by adjusting the payment terms. Moreover, the debtor portfolio is monitored well by the credit insurer.
Factoring is an important part within the debtor management as well. Factoring is a form of financing of which the company can profit. When taking out a factoring contract, outstanding invoices are directly paid by the factoring company. Because the realized turnover is paid directly, you create a financial buffer and working capital that you can use to (re)invest. Moreover, you profit, just like with a credit insurance, from a debt collection system, provided that this is part of the contract. With factoring, you can also choose for the factoring company to take on the debtor management.
The biggest difference is that with factoring, the outstanding invoices are paid directly to be able to optimize the cashflow. With a credit insurance, the outstanding invoices are only paid when a debtor is not able to pay due to insolvency. Due to the direct payment of the outstanding invoices, factoring is much more expensive. The premium costs of a credit insurance are between 0.075% and 0.35%. the costs of factoring are bewteen 0.1% and 1%. next to the difference in payment and the costs, there are some other differences. A credit insurance offers multiple components, among which a creditworthiness check and the continuous evaluation of the debtor portfolio. But factoring offers the opportunity for the perfect cashflow.
This depends on the business operations and the debtors. For example, if you have a low DSO (days sales outstanding), then is factoring less effective. However, if you have a high DSO, which is often the case in the construction industry, then factoring is definitely sensible. A credit insurance is however sensible as well. Taking out a credit insurance as well as taking out a factoring contract could help safe your company a lot of money.
Do you want to know for sure whether a credit insurance or factoring is the best fit for your company? Contact us! In a completely free personal consultation, we will discuss all possibilities with you, and we will offer the best strategy for your company of the basis of our expertise and experience.
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