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What is the difference between credit insurance and factoring ?
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Before distinguishing the differences between factoring and credit insurance, it is necessary to recall the services offered by these two techniques:
The factoring contract
It is a technique that allows to offer 3 services (cumulative or not):
- 1 : Financing of receivables,
- 2 : The management of accounts receivable,
- 3 : The guarantee against the unpaid.
With factoring you can improve your cash flow and avoid bad debts !
1 : The financing of customer invoices
In exchange of the invoices, the factoring company advances the funds granted to the policyholder, after deduction of factoring, financing and guarantee funds (and any reserves).
The policyholder receives the payment of all or part of the amount of its invoices within 24 hours without waiting for the due date of the payment.
2 : Client Account Management
Factoring makes it possible to outsource the management of its customer by the Factors.
The various credit management services:
- Accounting
- Monitor your accounts receivables
- Track your customers’ payment habits
- Imputation of regulations
- Litigation actions
- Relaunch
- Recovery
The company, freed from its services, can thus focus entirely on its development.
3 : The unpaid warranty
Factoring companies offer a guarantee against unpaid invoices.
This allows companies to protect themselves against the risks of failure of their customers.
The company recovers up to 100% of the amount of the secured claims.
What are the benefits of Factoring ?
- Improve your cash flow immediately
- You ara sure to get paid
- Increase your commercial competitiveness
- You can improve your balance sheet ratios of your company
- You can reduce your costs through outsourcing of receivables management and collections services
The credit insurance contract
The credit-insurance only guarantees the customer risk.
Trade credit insurers insure only against the risk of non-payment
For this, it relies on several services:
- Analysis and review of client solvency : prevention and supervision of all clients
- Monitoring of doubtful debts
- Collections services
- Payment of compensation in case of disaster
- Portfolio assessment and securitisation
A factor company does not provide cover against non-payment on its own. Many factor companies have trade credit insurance companies partner to provide this cover.
What is the main difference between credit insurance and factoring ?
Even if Factoring includes a credit insurance service, it is mostly a cash tool. Its main purpose is financing, while credit insurance guarantees customer risks.
These two techniques are therefore complementary. Factoring, before financing the invoices, needs to guarantee the receivables. The factor can do this internally or externally by purchasing insurance from a credit insurer.
For the company, credit insurance makes it possible to secure its accounts receivable with monitoring and evaluation of payment risks while factoring finances its cash.
