Although credit insurance is the key to unlocking your profit potential, understanding your financing options opens more doors to maximize your sales growth.
Usually involves a revolving line of credit secured by the borrower’s assets. The typical assets used to collateralize or back the loan are real estate, accounts receivables (A/R), inventory and equipment. This traditional approach works if your needs are significantly lower than your asset value and your cash flows remain consistent. The two common formats are either a line of credit or an A/R financing/discount (borrowing against your A/R). The lender will typically limit this type of plan to a percentage of the asset value, i.e. the loan to value ratio (LVR)
Foreign A/R is often excluded or the collateral value (discounted percentage) is greatly reduced by many lenders. Some domestic A/R may not qualify as eligible collateral depending on industry sector or if highly concentrated.
Credit Insurance allows you to bring in or qualify these otherwise excluded assets back into the collateral pool at peak value.
Creative methods are needed to obtain financing for sales to buyers that have financial difficulty or cannot support the level of financing the seller desires to give.
Factoring: A financial transaction whereby a business sells its A/R to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Unlike traditional lenders whose emphasis is on the creditworthiness of the borrower, factors focus first on the credit worthiness of the debtor, the party obligated to pay the invoices for goods or services delivered by the seller.
Forfaiting: A financial transaction involving the purchasing of receivables from exporters. The forfaiter takes on all risks involved with the receivables. It is different from factoring as forfaiting is a transaction-based operation while factoring is a firm-based operation: In factoring, a firm sells all its receivables while in forfaiting, the firm sells one of its transactions.
Put Options: An insurance transaction that covers the non-payment of accounts receivables of publicly traded U.S Corporations (or select major European Corporations) in event of bankruptcy occurring during a specified contract period. Puts are especially helpful when one is contractually committed to continue supplying a distressed company with product, where the product has high margins to absorb the Put cost (risk premium).
Some companies do not have sufficient cash flow and qualified assets to support a traditional finance structure and must seek alternative financing to grow their business.
There are credit insurance products that facilitate lenders to shift the emphasis from collateralized asset formulas to insurance policy value decisions. The policy effectively supplants assets as the compelling collateral feature. This changes the emphasis from the sum formulation of asset value to a reliance on the credit insurance to support the trade loan as a secondary form of repayment.
You benefit because this allows you to obtain a much higher line of credit. You may borrow up to the insured percentage of your A/R portfolio.