Credit management options comparison

Bad Debt Reserves vs. Factoring vs. Letter of Credit vs. Credit Insurance

Definition: Use of a bad debt reserve to offset losses should any customers become unable to pay

Pros of Bad Debt Reserves:

Cons of Bad Debt Reserves:

Company bears burden and cost for internal credit management resources needed to mitigate risk
Depending on risk tolerance, may result in overly conservative limits that reduce potential revenue
Ties up working capital that impacts capital allocation of the balance sheet
Typically does not protect from large and unexpected catastrophic loss
Utilize unreliable third party data services

Definition: An agreement with a third party company to purchase accounts receivable at a reduced amount of the face value of the invoices

Pros of Factoring:

Cons of Factoring:

Depending on contract structure, may not protect against non-payment events
Loss of control of customer relationships
Capacity constraints associated with line availability
Cost range between 1% and 4% of a receivable plus interest on the cash advance that can equal up to 30% in annual interest
Does not indemnify full invoice

Definition: A bank guarantee that the payment of a buyer's obligation will be received on time and in the correct amount

Pros of Letter of Credit:

Security for both seller and buyer
Financial standing of the buyer is replaced by the issuing bank
Because of the guarantee, seller can borrow against the full receivable value from its lender

Cons of Letter of Credit:

May only cover a single transaction for a single buyer and can be tedious and time consuming
Expensive, both in terms of absolute cost and credit line usage with the additional need for security
Ties up working capital for the buyer
Competitive disadvantage when competitors are offering open terms
Lengthy and laborious claims process

Definition: A business insurance product that protects a seller aginst losses from nonpayment of a commercial trade debt

Pros of Credit Insurance:

Empowers companies to confidently gorw sales without credit concerns
Guaranteed protection against non-payment or slow payment
Enhances efficiency of a company's internal credit department with fast credit limit requests and ongoing buyer monitoring
Allows exporterrs to offer safe, open terms overseas
Expands a company's financing options by increasing its borrowing base with secure receivables

Cons of Credit Insurance:

Fill in the form below and our trade credit specialists will be in touch as soon as possible.

Call us: 0800 771 168

Get A Free Quote!