By Athos Kyranides
Small to medium-sized enterprises (SMEs) exposed to the risk that some of the trade debtors will not pay their outstanding balances, resulting in bad debts, can have peace of mind by protecting some or all invoices against non-payment.
Every businessman knows that cash flow and liquidity are the lifeline of a business.
Without cash flow, a business risks closure even if it generates satisfactory sales and paper profits.
Late payment of invoices and bad debts are some of the leading causes of SME failures across Europe.
To protect against default risk and have peace of mind, an SME can secure credit insurance on all or some of its customers.
With credit insurance, you have a simple solution against the risk of non-payment.
Factoring vs Invoice Discounting
Most people are familiar with the term factoring, but in essence, both factoring and invoice discounting are financial services aimed at releasing cash tied up in unpaid invoices.
The essential difference is who takes control of the sales ledger and responsibility for collecting the receivables and whether the arrangement is confidential or not.
With factoring, the business assigns control of its sales ledger to the finance provider who becomes responsible for chasing customers for settlement of the invoices.
The customers settle their obligation directly with the finance provider.
With invoice discounting, the business retains control of its own sales ledger and is responsible to chase payments from its customers in the usual way.
The customers continue to pay their supplier as there is no need for them to know that a third party is involved.
Credit insurance max protection
Credit insurance means you pay a small premium, but you make sure you’ll always get paid, even if a customer stops paying, refuses to honour the outstanding balance or goes bankrupt. You can secure protection for 90% of invoice value.
Alternatively, an SME can combine credit insurance with invoice discounting and secure immediate cash to boost its cash flow while also securing credit insurance.
Many businesses are worried about the cost of credit insurance which is not excessive if you consider the risk protection that it provides.
The credit insurance cost depends on the customer’s risk profile and credit status and will typically range between 0.4% to 1.0% of invoice value.
The better your customer, the lower credit insurance rate you are likely to secure.
Athos Kyranides is Head of Trade Finance Operations at Eurivex Trade Finance Limited