Trade Credit Insurance Protects Against Customer Non-Payment
Linens N Things, Circuit City, Kodak, Adelphia, Radio Shack, General Motors… The list of blue chip companies that stung small vendors by filing bankruptcy is never-ending. Thankfully, many businesses that take advantage of factoring can also make use of a service that helps protect them against the risk that the customer does not pay.
When you sell your invoices to a factoring firm, you get the funds upfront that you need for working capital and for investing in the growth of your business. There is no need to wait 30-90 days for your money.
Factoring by itself, does not necessarily protect you against non-payment by your customer. If factoring is done “with recourse” and if your customer does not eventually pay the invoice, the factor can turn the invoice back to you.
The Solution: Receivables Factoring Plus Credit Protection
There is a solution that will provide risk protection in case your client fails to pay the invoice because of bankruptcy. It is called trade credit protection.
One option is to use an established factoring company that offers a credit protection policy as part of its factoring packages. One of the best things about factoring is that you can outsource your credit department and risk to the factor. If an invoice goes bad, you are protected, and the factor is responsible. This arrangement is considered a non recourse factoring facility. The factoring company has a master credit policy against account debtor (your customer’s) bankruptcy. Under this arrangement, if your customer files bankruptcy, you are protected. An established factor can offer this because they have the ability to spread the risk among many clients.
This kind of arrangement might seem to offer greater flexibility than the non-recourse solution. But there is a considerable problem with this approach, especially with smaller companies or businesses with a concentrated client list –, i.e., they only have a few clients. Creditors do not like it when you have very few clients – and this drives up the insurance rates you will pay. Therefore, these policies can be very expensive.
On the other hand, if you sign on with a factoring company that already has a credit insurance policy, then your receivables will be protected under their policy at minimal cost to your business. It’s a hidden benefit that most prospects wouldn’t otherwise know exists. You should always ask the factoring company if they offer credit protection or non recourse factoring.
Credit Protection from Paragon Financial
Paragon Financial offers credit protection along with its AR Invoice Factoring and PO Funding at minimal additional cost. Less than 20% of Factoring Companies qualify for and offer Credit Protection.This service is one of the most widely asked for among our financing offerings and has made Paragon Financial a leader in the industry for over two decades.