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Credit insurance and factoring are crucial financial tools that provide businesses with the stability to navigate uncertain markets. These tools help mitigate risks and enhance liquidity, especially in international trade, where macroeconomic volatility and complex environments are common.
At FCI’s 56th Annual Meeting in Seoul, a panel of experts discussed the intricate relationship between credit insurance and factoring. The panel included:
- Shan Aboo, Chief Commercial Officer for Asia Pacific, Allianz Trade;
- Neil Shonhard, Chief Executive Officer, MonetaGo;
- Dorota Szcześniak, Member of FCI Executive Committee and Supply Chain Finance Committee;
- Karol Leszczynski, Product Manager, Comarch.
Credit insurance and factoring are two financial tools that work in tandem to mitigate risks and enhance business liquidity. Their symbiotic relationship is crucial in providing businesses with the stability needed to navigate the uncertainties of international trade.
Understanding factoring and credit insurance
According to FCI, “International factoring is the process of purchasing an invoice from an exporter in one country and collecting it later from their buyer/importer located in another country. The exporter receives payment upfront from the factor by way of a discount against the invoice, and the source of repayment comes from the proceeds paid by the buyer/importer at the due date of the invoice.”
Source: FCI
Credit insurance, on the other hand, protects businesses against the risk of non-payment by buyers. It covers the receivables, ensuring that even if a buyer defaults, the business will still receive payment, either partially or fully.
This insurance is particularly valuable in international trade, where the risk of default can be higher due to volatile economic conditions, political risks, and other factors.
Source: Comarch
For businesses, credit insurance both mitigates risk and enhances liquidity. By converting receivables into immediate cash, companies can improve their cash flow and financial stability. This is particularly important for businesses with limited payment records or those operating in international markets.
Credit insurance gives prospective traders the confidence to engage with new buyers and enter new markets, knowing they are protected against potential losses.
How they complement each other
The relationship between credit insurance and factoring is symbiotic because they complement each other in several ways. These include:
- Risk mitigation: Credit insurance mitigates the risk for factors by providing coverage against non-payment, making factoring more secure and attractive to businesses. Factors can confidently purchase receivables, knowing they are protected against buyer defaults.
- Enhanced liquidity: By converting receivables into immediate cash, factoring improves a business’s cash flow. Credit insurance further enhances this by providing additional security, which can lead to higher advance rates from factors.
- Market expansion: For businesses looking to enter new markets, credit insurance provides the confidence needed to engage with new buyers. It offers protection against unfamiliar risks, encouraging businesses to expand internationally.
- Data and insights: Credit insurers have extensive databases and analytical tools to assess the creditworthiness of buyers. This information is valuable for factors, helping them make informed decisions about purchasing receivables.
The panellists highlighted these benefits during the FCI’s 56th Annual Meeting in Seoul. Aboo said, “Credit insurance provides a safety net by protecting companies against the risk of non-payment, making the factoring process more secure and appealing.”
Practical applications
In practice, the relationship between factoring and credit insurance involves close cooperation between factors and insurers. Factors rely on insurers’ data and insights to assess the risk of receivables, and insurers, in turn, benefit from the business generated through factoring.
In Poland, for example, 50% of factoring agreements are covered by credit insurance, though overall penetration rate of trade credit insurance is relatively low. Szcześniak said, “Credit insurance is a very important partner in our business, especially in international markets where we have limited access to foreign lawyers and financial data.”
