This is a time of high uncertainty and risk. For many companies the coronavirus lockdown has made existing debt unmanageable. The list of companies that have stopped paying vendors and rent is rising, as is the number filing for bankruptcy.
The good news is that businesses that use a particular type of factoring can protect their AR from their customers’ insolvency.
What is Factoring?
Factoring is a form of financing where you sell your 30-, 60-, or 90-day B2B or B2G invoices to a factor for immediate cash. Typically, 80%-90% of the value of the invoices is advanced immediately.
Your factor will manage your AR and your customers will pay their invoices to the factor. Once your customer pays their invoice, the factor provides the remaining amount to you, minus a fee.
Failure to Pay
But what happens if a customer fails to pay their invoice? Some factors not only charge high rates they also will hold the client liable for the customers’ non-payment. This is called “recourse factoring.”
Some of these companies offer installment payment plans, which require you to pay back the full amount of the invoice plus fees if your customers fail to pay their invoices. This scenario can lead to a debt spiral.
Businesses that take advantage of invoice factoring need to be protected against the potential bankruptcy of their customers. That’s where credit risk insurance (also called trade credit insurance) comes in.
However a business with a small client base may find that credit risk insurance comes at a steep price.
By contrast, if you obtain factoring through Spearfish, your AR will be protected automatically by credit risk insurance held by our financial partner. They’ve leveraged their stellar credit to obtain this credit risk policy at neglible rates.
Factoring ensures that you obtain the cash flow and working capital needed for your business, and credit risk insurance protects you against your customers’ insolvency. Factoring that includes credit risk insurance is debt-free financing.
We invite you to book a free phone consulation with one of our staff to learn more.
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“Everyone’s distressed watch list has become so big that it doesn’t even make sense to call it a watch list -- it’s everyone. You turn page after page and it’s all red. It’s a sea of red.” - Derek Pitts, head of debt advisory and restructuring at PJ Solomon