Many companies choose to self-insure in the form of bad debt reserves.
This fund, set aside, is available to offset the deficit should any of your customers become unable to pay. The cost considerations are as follows:

• You will need to invest in credit management resources, systems and data to consistently analyse and monitor your credit risks;
• It may impact your sales, depending on your given risk tolerance: you will not want one customer to eat up all of your reserves should they go insolvent;
• It will impact your working capital;
• You may struggle to build reserves fit for large and unexpected catastrophic losses.

Invoice finance gives you access to money from your outstanding invoices before your customers pay you. An invoice finance company will purchase your invoices at a reduced amount of their face value plus a fee. You may choose to get funding against a single/ handful of debtors or all of your outstanding invoices.
Factoring companies will also control the sales ledger and collect the debts.

It is important to take into account that not all invoice finance companies will assume the risk of non-payment of the invoices they purchase (this is known as non-recourse finance). If they don’t, you will need to reimburse the funding if your customer does not pay.

Other impacts include:

• It will affect your margin;
• You may lose control of customer relationships;
• Factors will have a maximum amount they are prepared to purchase.

Impacts include:

• Only covers a single transaction for a single customer – regularly relying on this form of protection can be tedious and time consuming for you;
• It’s expensive for you and your customer, both in terms of absolute cost, time (administration) and in terms of credit line usage with the additional need for security;
• The claims process can be lengthy and laborious and can be derailed by minor discrepancies in paperwork.
  

Credit insurance is a business insurance product that protects you against unpaid trade debts. Credit insurers provide a 3-tiered service: financial information on your customers (credit checks and monitoring), collection of unpaid debts and, if all else fails, you are protected by insurance.

The insurance premium cost is linked to the level of covered transactions, and additional service fees may be charged. The benefits are:

• It secures trade with new and existing customers;
• It helps you select the most stable prospects to go after;
• It enables you to offer competitive credit terms;
• You can save on credit information costs, third-party collection costs and protect your cash flow.

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There are several options and tools to mitigate credit risks. You should weigh the costs and benefits of these options and investigate carefully to determine the best fit for your company. Download and feel free to share this guide.