Credit insurance or factoring: what covers what?

What credit insurance does

Credit insurance covers the risk of a business client not paying. Think of insolvency or a suspension of payments.

You pay a premium on your turnover. If payment fails to come, the insurer pays out and takes over the claim.

With financings, credit insurance is often compulsory. The lender wants certainty over the asset it is funding.

The four forms you will come across

1. Per transaction. For a one-off large order with a single client.
2. Per debtor. For a regular client to whom you send high invoices often.
3. Per country. For clients outside the Netherlands, where you know payment behaviour less well.
4. Whole turnover policy. The most comprehensive form, covering your entire turnover.

Which form fits depends on your size and on how often you supply on account.

What credit insurance costs

For a whole turnover policy, a premium below 1 per cent of turnover was generally quoted. What you pay depends on the form, your sector and the spread of your debtors.

Insurers also set requirements for your own process. You have to run demonstrably sound receivables management to be able to claim under the cover.

How you set that up is covered in receivables management and liquidity.

When a policy suits your business

Credit insurance is a cost, so work out whether you need it.

Four situations in which a policy is more often appropriate:

• You regularly write off unpaid invoices.
• You are growing fast, so your receivables position rises faster than your buffer.
• You work on thin margins, so one non-payer wipes out the profit on a whole project.
• You export a lot, where the payment behaviour of customers is harder to judge.

The insurer screens your customers in advance and sets a credit ceiling per debtor. If payment fails to come, the insurer tries to collect and pays out an agreed percentage of your claim.

The difference with factoring

Credit insurance pays out if your client does not pay. Until that moment you are waiting for your money.

With factoring the invoice amount is paid out as soon as the invoice has been transferred. So you wait neither for the payment term nor for a claim to be settled.

On top of that comes the receivables management. The credit risk is covered within the factoring structure through credit insurance.

When you insure only, after all

No liquidity question? Then credit insurance is the lighter instrument. You cover the risk alone, without handing over your receivables process.

Is your money tied up in your receivables? Then you do have a liquidity question. Insurance does not solve that.

Compare the options in factoring or bank credit or take the quickscan.