Trade Credit Insurance Vs. Factoring

June 1, 2022

Trade credit insurance and factoring are both identifiable disciplines in debtor management. If you are in business with international clients, you may have realised that these tools are complementary.

But what is the difference between these debtor management instruments? How are they related, and which is the right choice for your company? Read on to learn more about how Niche Trade Credit can help protect your account receivables and reduce credit risk.

Understanding Credit Insurance

Trade credit insurance, also known as debtor insurance, covers businesses that supply goods or services to their customers on credit. It’s basically the credit line that your organisation extends to third-party insurance companies when you make a purchase.

Credit insurance guarantees customer risk and offers certainty that your turnover will eventually be achieved by eliminating the risk of default. If your debtors fail to pay the outstanding invoices, the credit insurance company will fund the invoices. Besides paying the outstanding debts, a credit insurer offers several other services, including:

  • Debtor management
  • Continuous monitoring of the debtor portfolio
  • A debt collection system
  • A creditworthiness check
  • coverage against default

Remember that if you don’t have credit insurance, you may have no choice but to send your bad debt to various collections services to try and recoup the money. Unfortunately, this method is time-consuming and doesn’t guarantee the full amount you are owed. And that’s where credit insurance firms like Niche Trade Credit come into play to offer credit protection.

The Basics of Factoring

Unlike credit insurance, which insures you against the risk of non-payment, factoring allows you to obtain working capital for your business by utilising your outstanding invoices as collateral. Essentially, the factoring contract provides three major services: receivable financing, coverage of the risk of non-payment, and management of accounts receivable.

The logic behind the factoring concept is that a factoring company will purchase your outstanding invoices for a certain percentage (around 80 per cent) of their total value, and you will receive the funds instantly. After the transaction is complete, the factoring company sends the money granted to you after deducting applicable fees. With factoring, you can enhance your business’s cash flow and keep off bad debt.

What Is The Difference Between Credit Insurance And Factoring?

The main difference between these two principles is that factoring is a cash tool whose purpose is financing. This is particularly true because many factoring companies utilise recourse factors (an agreement that provides a time limit for invoice funding).

On the other hand, credit insurance provides coverage against non-payment. It also offers many other components, including continuous portfolio assessment, suspicious debts monitoring, and client solvency review.

How Niche Trade Credit Can Help

If you’re unsure which instrument is better suited for your company, Niche Trade Credit can help you make an informed decision. Please contact us to know how your company can benefit from our credit insurance solutions and learn more about related services that can help your organisation trade globally with confidence.

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