Many businesses are looking for ways to improve their cash flow whilst protecting themselves against non-payment. Two popular solutions are factoring and credit insurance. But can they be combined? In this blog, we’ll give you a clear overview of the options and their associated benefits.

What is factoring?

In factoring, a company sells its outstanding invoices to a specialist financial partner, the factoring company (or ‘factor’). In return, the company immediately receives a large portion of the invoice amount without having to wait for the customer to pay.

The factoring company then takes over the management and collection of the invoices. Often, the risk of non-payment is also covered. For each customer, the factor sets a credit limit: the maximum amount for which invoices will be purchased.

Benefits of factoring

The major advantage of factoring is clear: businesses gain faster access to cash. This ensures a healthier cash flow, less financial pressure, and extra scope to invest or grow.

What is credit insurance?

Credit insurance protects businesses against the risk of customers failing to pay their invoices, for example, due to bankruptcy or payment difficulties.

As with factoring, a credit limit is set for each customer. If a customer fails to pay and the policy conditions are met, the credit insurer reimburses 85% or 90% of the outstanding amount up to that credit limit.

Credit insurance, therefore, focuses specifically on one aspect: protection against non-payment. Unlike factoring, it does not provide immediate financing of invoices.

How do factoring and credit insurance work together?

Although factoring and credit insurance work differently, they can complement each other perfectly.

With factoring, the invoice becomes the property of the factoring company. Consequently, the risk of non-payment also lies with them. To protect themselves, many factoring companies have their own credit insurance policy.

Nevertheless, many factoring companies also allow their clients to take out their own credit insurance. That policy is then ‘pledged’ to the factoring company. This means that any claim payment is made directly to the factor.

Why might this combination be of interest?

Having your own credit insurance often offers greater flexibility and control. As a business, you are in direct contact with the credit insurer, which can offer various advantages:

• Better pricing terms if you have had few claims in the past.
• More customisation in the policy terms.
• The option of schemes with “blind cover”, whereby cover automatically applies up to a certain amount without prior credit analysis.
• • Particularly interesting for companies with many smaller clients.
• Some insurers offer the option of temporarily increasing a credit limit for an additional premium. This can be useful if you need extra room for an important customer.

When the factoring company takes over these credit limits, more invoices can be financed. This provides your business with greater liquidity.

This is also beneficial for the factoring company, as part of the risk is insured externally. Consequently, factoring companies are often willing to reduce their factoring fee, meaning that the combination of factoring and credit insurance can be financially neutral or even more cost-effective.

When is the combination less beneficial?

However, this combination is not the best solution for every business. For smaller SMEs, separate credit insurance can represent an additional cost that does not always outweigh the benefits. Furthermore, managing two separate contracts also entails additional administrative work.

In some situations, it is therefore simpler and more efficient to have both the financing and the protection against non-payment handled entirely by the factoring company.

In summary

Factoring and credit insurance are not mutually exclusive; on the contrary. For many businesses, combining the two can lead to stronger cash flow, better protection against non-payment and greater financing options.

Whether this approach is worthwhile depends on factors such as the size of your business, your customer portfolio, your claims history and your financing needs. That is why a bespoke analysis is essential.

Nextfactor is happy to help businesses determine which solution best suits their situation and works with the leading credit insurers in Belgium to achieve this.