Companies take great care to protect or insure their inventory, capital equipment, buildings, and employees. So naturally they research alternatives when looking for a solution to protect their most valuable and volatile asset -- their accounts receivable. Many companies use factoring or credit protection as security against credit losses. Others have turned to credit insurance. While both services afford coverage from credit losses, they can result in different levels of coverage under the same circumstances. Below is a list of frequently asked questions about factoring versus credit protection. If you have additional questions or if you would like to discuss how you can put the resources of CIT to work for your company, please contact us. We look forward to working with you. Frequently Asked Questions What is factoring? What is credit insurance? What is the difference? A side-by-side comparison. Which one is right for your company? Want to learn more? Want a free price quote? What is factoring? Factoring is a complete financial package that combines credit protection, accounts receivable bookkeeping, collection services and advances against your receivables. The factor purchases your accounts receivable and collects the money from your customers. If a customer is financially unable to pay its debts, the factor assumes responsibility for the credit loss. What is credit insurance? Credit insurance is an insurance policy. Like car insurance, it typically has an annual premium and a deductible. Companies that use credit insurance may need to maintain in-house bookkeeping, credit and collections departments as well as credit files and information systems necessary to support these departments. What are the typical differences?

Feature	Factoring	Credit Insurance
Protects against credit losses	Yes	Yes
Credit risk covered	100%	Negotiated % after applicable deductible
Amount of coverage	Full value	Capped max loss per policy
Commission based on actual sales	Yes, when sales occur	No, typically based on sales volume or credit lines
Frequency of commission	Monthly	Annually
Improves cash flow	Yes	No
Includes A/R bookkeeping	Yes	No
Includes collection service fees	Yes	No
Buys your accounts receivable	Yes	No
Due diligence falls on provider	Yes	No
Frequency of claim payments	90-120 days past due	Annually after satisfying deductible and co-insurance

Which one is right for your company?

The decision of factoring versus credit insurance depends on the level of coverage you want and whether you want to maintain internal credit and collection staffs. In terms of cost, credit insurance usually costs less than factoring. That is because it does not typically include the bookkeeping and collection services that factoring does. However, should you have a credit loss, your coverage will be less under credit insurance than under factoring. Terms and costs of coverage vary between insurance products and factoring. You need to make an independent evaluation.

Factoring is a service that is used by companies of all sizes, from startups to companies with more than $500 million in annual sales. These companies either do not want to incur any credit losses or want to outsource their credit and collection functions, thereby saving on overhead. Factoring enables companies to improve cash flow both through advances against accounts receivable either from the factor or your existing lender and efficient collection efforts. Factoring may also improve your balance sheet since the financing receives off balance sheet treatment.

Want to learn more?

For more information about how you can protect your accounts receivable through factoring, call us at (800) 248-3240 or e-mail us. We look forward to working with you.

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