In his latest blog, Mark Barton of our UK associate, Hanwell Atkinson Ltd, assesses the pros and cons of non-recourse invoice discounting compared to recourse invoice discounting allied with a credit insurance policy.
Many companies factoring their invoices also wish to take advantage of credit insurance or bad debt protection and this can be achieved in one of two ways. Some factoring companies offer a non-recourse factoring facility which, as the name suggests, is without recourse to the client in the event of a failure of the customer.
The factoring company will set individual credit limits on each customer and will accept the bad debt loss in the event of the insolvency of that customer up to the agreed limit.
The advantage of this facility is that the client only has to deal with one company but the disadvantage is that the agreed credit limits can sometimes be restrictive. This is because the factoring company will look at its own overall indebtedness to a debtor company and when it considers that the overall exposure is at certain high level it will probably cease to agree any new limits. As a result a client of a factoring company wishing to sell on a non-recourse basis to a well-known customer may find that he can only obtain a small credit limit because the factoring company has reached its own internal limit.
An alternative is a factoring facility without credit cover together with a separate credit insurance policy because this has the advantage of greater flexibility. There are a number of credit insurance companies in the market all having different strengths and weaknesses and the art is to know which insurer will give the best levels of credit limit cover at the most competitive cost.
Credit Insurers are experts in gathering, monitoring and underwriting Risk and that is why most banks which finance receivables have a credit insurance policy to protect themselves.
If you choose the non-recourse factoring route, all of the power is with the Bank or Funder with regards to setting your credit limits/funding limits and facility size. The Bank or Funder can reduce your funding limits and or facility size as and when they see fit.
In the majority of occasions, opting for the non-recourse financing option from the Bank or Funder will be cheaper compared to a recourse financing facility with a separate Credit Insurance policy. But, as with most things in life, you pay for what you get. The service available with the right broker and the right policy will always be superior to having all your eggs in one basket with a ‘one stop shop’. Service encompasses issues such as credit limits, feedback, claims, mid-term policy amendments. If a Credit Insurer reduces or removes a credit limit there will be a dialogue between the client, broker and insurer to resolve the matter; the same cannot always be said if the Bank or Funder reduces or removes a funding limit.
By having all your eggs in one basket – insurance and funding with one provider – what may be perceived as the strengths of the arrangement at the outset can equally become its weaknesses.