You want better cash flow. And you want protection against customers who don’t pay. Factoring and credit insurance each help with one of those. But can you use them together? And when does that make sense?
What is factoring?
With factoring, you sell your unpaid invoices to a factoring company, often just called a “factor”. You get most of the invoice value upfront. The factor then collects the payment from your customer. In many cases, it also takes on the risk that your customer won’t pay.
For each customer, the factor sets a credit limit. That’s the maximum value of invoices it will buy for that customer.
Why businesses use factoring
The main benefit is simple: you get paid sooner. Your cash flow improves. And you have more room to invest or grow.
Want to know more? Read 8 reasons SMEs turn to factoring.
What is credit insurance?
Credit insurance, also called trade credit insurance, protects you against customers who don’t pay. For example, because they go bankrupt.
The insurer also sets a credit limit for each customer. If a customer doesn’t pay and you’ve met the policy terms, the insurer pays out 85% or 90% of the unpaid amount, up to that limit.
Keep in mind: credit insurance protects you, but it doesn’t finance your invoices.
How do factoring and credit insurance work together?
When you factor an invoice, it becomes the property of the factor. So the factor carries the risk if your customer doesn’t pay. That’s why many factors have their own credit insurance.
Many will also accept a policy you’ve taken out yourself. Your policy is then assigned to the factor. If the insurer pays out, the money goes straight to the factor.
Comparing providers yourself? Read our 5 tips for comparing factoring companies.
Why combining them can pay off
- A better price. A clean claims history often gets you better terms on your own policy.
- Cover that fits your business. You can tailor your own policy to the way you work.
- Discretionary limits. Some policies cover customers automatically up to a set amount, without checking each one. Useful if you have lots of smaller customers.
- Temporary higher limits. Some insurers will raise a credit limit for a while, for an extra premium. Useful when a key customer places a big order.
If the factor takes over these higher limits, it can finance more of your invoices. And because your insurer covers part of the risk, the factor may lower its fee. The combination can then cost about the same as factoring alone. Sometimes even less.
A simple example (fictional): the factor gives one of your customers a credit limit of €50,000. Your own insurer agrees to €80,000 for that customer. If the factor accepts the insurer’s limit, it can finance €30,000 more of your invoices to that customer.
When is combining them less worthwhile?
For a smaller SME, a separate policy can cost more than it saves you. And two contracts mean more admin.
Sometimes it’s simpler to let the factor handle both the financing and the protection against bad debts.
Read how Nextfactor helps you choose
Frequently asked questions
Does the factoring company pay if my customer doesn’t?
It depends on your contract. With non-recourse factoring, the factor or its insurer carries the risk if your customer goes bankrupt. With recourse factoring, the risk stays with you.
Can I keep my existing credit insurance when I start factoring?
Often, yes. Many factors accept an existing policy. It’s assigned to them, and any payout goes to the factor.
Is my own credit insurance worth it for a small SME?
Not always. If your turnover is on the small side, the cost of the policy can outweigh the benefit. Factoring that already includes cover is often the simpler option.
Got another question? See all our FAQs.
Factoring and credit insurance: yes or no?
The two don’t rule each other out. Together, they can strengthen your cash flow, your protection and your financing options.
Whether it’s right for your business depends on your size, your customers, your claims history and how much financing you need. So it pays to look at your own situation first.
Want to know whether combining them makes sense for you? Get in touch or email info@nextfactor.be.
About the author
Peter Hendrix is the founder of Nextfactor. He has worked in factoring for around thirty years. He knows how banks and fintechs work and how their offers differ. Today, he helps SMEs find the financing that suits them.