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Credit Insurance


Stutwo

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We're toying with the idea of Credit/debt insurance. The process appears to be that you give the insurer either your top customers or individuals on an ad-hoc basis, they in return do some credit scoring behind the scenes and approve a credit limit for the client. They then guarantee a proportion of the credit limit and will take over the debt chasing for you after your usual term, then you claim for repayment if they have no luck. Of course, this is in return for annual fee and what seems to be a small (0.3 to 0.6) percentage of the debt. Question is, has anyone done this and if so, what was your experience of the process?
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I did invoice factoring for a while in my previous business which is pretty much the same as you are describing under a different name. The main disadvantage for me was that they were quite aggressive with my customers - showering them with reminders and then unpleasant threats as soon as they got a day over payment terms. You can no longer control what happens once your invoice is sent. This may or may not be a problem for you depending on the style of your business and type of customers you have - if you deal with big organisations with accounts depts they are probably used to that sort of thing but it is quite intimidating for individuals and smaller groups - you lose the personal touch, if that is your business style.

 

Maybe was just the company we were using and others are different - but as they are there to extract the money on time, probably not.

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I looked into this business around the time of the collapse of P&H and Carrillion and the ABI were boasting about how much their members had paid out in claims. It didn't seem to occur to them what such puffs said about their industry's credit rating skills or perhaps lack of them. In the case of the high profile collapses listed in the ABI releases any supplier could have seen how risky they were just by looking at the freely available balance sheets. I suspect Tim is right and the balance is made up of chasing people who could pay given a few more days. I suppose it all depends on your experience of bad debts and whether you want the chased customers back afterwards.
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Debt chasers for collections companies have no interest in whether your customer is important to your business's future. So where you might leave credit control short of collection for a regular annual customer they do NOT. You could need a good sales department to raise lots of new leads.
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...you give the insurer either your top customers or individuals on an ad-hoc basis, they in return do some credit scoring behind the scenes and approve a credit limit for the client.

 

You might want to check that out carefully.

 

I've worked for a couple of companies who did something similar and you had to give them all your customers and if they came back and said 'no' to one of them you couldn't just sell to them anyway and take a chance.

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Why are you looking at factoring / insurance? If you have cash flow issues or persistant latepayers you should be looking to solve those problems and possible refuse future orders from certain people or adjust your pricing. Sub contracting your invoices out will cost you money, cause problems for your good clients and not actually fix the underlying problem which will only get worse.
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We looked into it briefly a few years back, after one customer had gone bust and left us out of pocket. My impression after talking to a couple of firms was that any customer that you could afford to insure against was unlikely to be a risk anyway. For us, it made more sense to double down on chasing invoices as they fell overdue, and sacking a couple of the worst offending customers.

 

Where credit insurance might be good is for industries like construction, where you are dealing with large firms who will generally pay up eventually, but (Carillion aside) are less likely to go under.

 

One other thing to consider is that suddenly starting with a factoring arrangement screams "cashflow problems" and may set alarm bells ringing amongst some of your customers, especially if it's badly handled.

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Thanks for the responses, interesting reading!

 

For those suggesting it can give the impression of cashflow problems, I can see how you would arrive at that in this situation and that in itself is definitely worthy of consideration. I was originally coming at it from the prospect of some new work and clients that would give us a larger than usual exposure to risk, and whether this was an idea worth pursuing to minimise that. Early days in the process so it's not something we've pursued beyond a brief initial enquiry.

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I believe that this is different from factoring, which as I understand it is more to deal with cash flow, this can work for businesses that have to pay out before a customer pays up. I know of somone back in the day who started a contracting recruitment firm, they would have to pay the contractors before their customers' invoices were due, factoring enabled them to do this. I don't think that factoring passes the responsability for the debt, it just helps with cash flow for a percentage of the invoice. If the customer is deliquent, the factoring company still want their money from you and will charge you for late payment.
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That wasn't how factoring worked for us. The invoice was issued instructing the customer to pay the factoring company - it said something like "this debt has been assigned to xxxx factors." On the due date the factoring company paid us the invoice balance (minus their charge) then the debt and the customer was theirs, whatever happened. It was tied in with our bank overdraft facility so they had quite a lot of say in what we could and couldn't do.

 

We had to factor all our invoices. I can't remember what happened about bad payers, if they could make us refuse them as customers.

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No experience of this but it seems to have many of the aspects of umbrella employment, PPI and a Curry's insurance on a washing machine.

 

I feel a lot like Tom. The only reason people gave me money was because of a personal service and inserting a money-driven, bureaucratic, impersonal entity into the relationship just wouldn't have worked.

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  • 3 months later...

Its called invoice factoring and it is only cheap for AAA rated customers, the rest you pay a high premium. Why would you need this from a customer who is guaranteed that they will pay, you need it for the ones that don't, and for them you pay a huge premium and commission.

 

We did a trick years ago and told all of our bad customers that we got invoice factoring (we didn't) and used this bogus company as an excuse not to give credit or be very strict on payment deadlines, telling them we had to report late payment which would go against their credit rating, etc. All the bad payers starting paying with that.

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