Understanding Factoring

What is Factoring?

Factoring insurance is an agreement with a third party company to purchase accounts receivables at a reduced amount of the face value of the invoives. These costs may range from 1% to 10%, based upon a variety of components. Some factoring services will assume the risk of non-payment of the invoices they purchase, while others do not.

When your company utilizes accounts receivable factoring:

You lose control of your customer relationships in a factoring agreement.
The factor that owns accounts receivable manages all credit matters involving those customer relationships.
You have to go through the factor in order to contact a customer.
These circumstances could harm customer relationships.
You may not be able to get payment guarantees on sold accounts receivable.
Any payment guarantees that are available can double factoring fees.

The Difference Between Factoring and Credit Insurance

Credit insurance is a compelling and affordable alternative to accounts receivable factoring. Credit insurance can strengthen both cash flow and strategic decision making.

Insuring accounts receivable with credit insurance:

Keeps your company connected to your customers.
Creates more predictable cash flow.
Allows you to conduct business without interference and with approved credit for your customers.

Factoring Explained:
A Real-World Example

Let’s look at a real-world example of the choice between credit insurance and factoring.

A company with $5 million in annual sales transactions choosing between purchasing credit insurance and selling its accounts receivable to a factor will see a significant difference in costs.

The Cost of Credit Insurance

Credit insurance covering $5 million in accounts receivable generally conservatively costs may cost between 0.25% to 0.50% of the insured amount, or between $12,500 and $25,000.This ensures that cash flow remains uninterrupted – if the invoice is not paid, the credit insurer covers the loss.

Credit insurance costs range from:

$5,000,000 x 0.25%, or $12,500

$5,000,000 x 0.50%, or $25,000

The Cost of Factoring Services

The fees involved in selling $5 million in accounts receivable to a factor are generally one percent of the total amount, or $50,000.

This amount does not provide any payment guarantees for the sold accounts receivable and such guarantees are not always available.

If the factor does offer payment guarantees, the cost of those guarantees is another one percent of the value of those accounts receivable. This adds another $50,000 to the cost of factoring and brings to the total cost with payment guarantees to $100,000.

Factoring only:

$5 million in accounts receivable x 1.0%, or $50,000

Factoring with payment guarantees:

$5 million in accounts receivable x 2.0%, or $100,000

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Proactive Risk Strategy Helps Company Strategically Grow

In the often volatile apparel industry, a steady cash flow and proactive risk strategy are imperative for successful growth. On the advice of Marcum LLP, a CPA firm, San Francisco-based apparel company CP Shades implemented credit insurance as a comprehensive solution to mitigate risk and strategically grow sales.

Read CP Shades Case Study

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Choose Credit Insurance Over Accounts Receivable Factoring

The numbers tell the story. Leverage credit insurance for the sake of your business to preserve your bottom line, protect your company from the risk of non-payment, and maintain your your customer relationships.