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.
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.
$5,000,000 x 0.25%, or $12,500
$5,000,000 x 0.50%, or $25,000
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.
$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