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Feature |
Credit insurance |
Letter of credit |
Factoring |
Self-insurance |
Costs |
$ |
$$$ |
$$ |
$ |
Cover / protection against credit risk |
Yes, insolvency, protracted default and political risks |
Yes, buyer default |
Yes, Insolvency and protracted default if non-recourse finance |
No |
Additional services |
Yes, credit risk information, risk assessment, market intelligence, debt collection |
No |
Yes, debt collection and credit information |
No |
Financing |
No, but can facilitate financing |
No, but can facilitate financing |
Yes, converts invoices into cash for a fee |
No |
Customer relationships |
Your customer is unaware of credit insurance contract. Better terms of payment enhance relationship |
Both are aware of the set up |
Collection by factor of trade receivable may affect client relations |
Maintains direct relationship with customer |
Option 2: Factoring
Definition: An agreement with a third party company to purchase accounts receivable at a reduced amount of the face value of the invoices
Pros of Factoring:
Cons of Factoring:
Option 3: Letter of Credit
Definition: A bank guarantee that the payment of a buyer's obligation will be received on time and in the correct amount
Pros of Letter of Credit:
Cons of Letter of Credit:
Option 4: Credit Insurance
Definition: A business insurance product that protects a seller aginst losses from nonpayment or overdue payments and late payment of a commercial debt
Pros of Credit Insurance:
Cons of Credit Insurance:

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What is credit managemant? Credit management is defined as your company’s action plan to guard against late payments or defaults by your customers. An effective credit management plan uses a continuous, proactive process of identifying risks, evaluating their potential for loss and strategically guarding against the inherent risks of extending credit. Having a credit management plan helps protect your business’s cash flow, optimizes performance and reduces the possibility that a default will adversely impact your business.