Many Polish companies even do not know that they grant a trade credit for their customers. When they do that? Each time an entrepreneur issues an invoice with deferred payment date, regardless whether it is 7 days, two weeks or three months. Unfortunately, many entrepreneurs do not analyse so thoroughly or at all their customers’ financial standing as financial institutions do. That is why one should definitely remember that while granting a trade credit, we assume the risk of non-payment for the issued invoices. A pragmatic entrepreneur should first think about protecting itself against such eventuality.
One of the tools to be used is a non-recourse factoring, i.e. with no right on part of a factoring company to have recourse to the customer’s funds in case of non-payment on part of the customer. What is the difference between such service and an ordinary policy insuring the receivable?
Well, an insurance company may offer a policy which will be used in case of a long-lasting insolvency or bankruptcy of the customer whom we have sold the goods or performed service. However, we must remember that damages may be paid after a long time since the moment the maturity date stated on the invoice has elapsed. Depending on the terms offered to their customers, insurers pay out the damages sometimes 90 and even after 180 days. Since we must remember that each insurance company will first make an attempt to recover the debt and if it proves ineffective – it will file the claim to the court. Finally, if it proves impossible to recover the money in the court, the insured will receive funds from its policy. Precious time is flowing by and problems with the company’s financial liquidity are growing. Liabilities that are not paid on time or no funds to purchase next materials necessary for the operation of the company may lead, in extreme cases, to its closure.
In turn, the above mentioned non-recourse factoring offers exchanging the issued invoices into cash, as early as within the period of their maturity, and in case of problems with payment, the factor does not file its recourse claim to the party it has granted funds to, but to the payer, i.e. in this case our client’s customer. If the factor does not enforce funds from such customer within relevant and pre-determined deadline, it applies to its insurer to pay the corresponding damages. This way, a Pragmatic Entrepreneur is insured against possible unpaid receivables and – additionally – it retains the advance payment already made by the factor and may use it to settle its current liabilities resulting from performed activity.
Consequently, the properly asked question should not be if, but when and how should I use a trade credit and our decision to possibly grant deferred payment deadlines for our customers should be preceded by a thorough reading and analysing of their financial statements.
Published on: 14 November 2016