Bad Debt Reserves vs. Factoring vs. Letter of Credit vs. Credit Insurance
If your customers are unable to pay, your company is at risk of having its cash flow disrupted, affecting your ability to do business. There are solutions available to help mitigate this risk, including self-insurance, letters of credit, debt factoring and credit insurance.
Each solution has its pros and cons and not every solution fits every customer or situation. Here’s what you need to know about different credit management options:
Self-Insurance (Bad Debt Reserve) Pros & Cons
Self-Insurance, or a bad debt reserve , is an amount of money a company sets aside to offset losses should any customers become unable to pay.
If a customer fails to pay, you can draw money from the reserve account to cover the loss. This allows you to avoid service interruptions of disruption of your company’s cash flow. Meanwhile, on your balance sheet, the amount you pay yourself to cover the bad debt is subtracted from your assets and equity and counts as a loss on your business statement.
Pros of Bad Debt Reserves:
Cons of Bad Debt Reserves: