Most invoice finance companies will provide their own credit protection cover at a premium of sales turnover (usually between 0.4% and 1.2% of gross protected turnover).
It is possible to obtain third party cover which most invoice finance companies would be happy to provide funding against. The invoice finance company would normally take a formal charge on the policy to ensure that they are paid out first in case of a claim.
There are several advantages of taking cover from a third-party provider:-
- Cover can be cheaper (and turnover is usually calculated on net sales rather than gross sales).
- The policy can be moved to another invoice finance provider without loss of cover in respect of outstanding claims.
- Work in progress can be included in cover. This is especially important to anyone who manufactures bespoke goods, incurs design costs or even contracts with a third-party manufacturer in full or in part of their fulfilment of goods. For example, if a company is involved in Steel fabrication, engineering, or white labelling of goods for their customers. Standard policies come on risk when goods are dispatched, and invoices are raised. This clause allows the insurer to extend the horizon risk backwards which means they adopt risk when the client receives the purchase order or enters a contract with their customer. If a company fails before the goods are dispatched, they will pick up any associated costs with the manufacturing element of that order. This would typically include labour, utility, design and material costs. The only element that isn’t covered is the ‘profit’ on the order. Insurers can normally include up to 6 months work in progress cover where needed.
- Paid when Paid contracts can be covered. Such clauses are becoming more popular in respect of recruitment (particularly healthcare, food and logistics). This is usually an uninsurable risk on standard policies as payment is often protracted past the agreed credit terms between the policy holder and customer. By insuring both the policy holder’s customer and ultimately their customer/end customer the risk becomes divisible and fundable. Credit Limits must be obtained on both parties.
- Recruitment Insolvency Notices can be covered. If a company is providing temporary labour, they will normally operate on weekly timesheets produced in the following week with weekly invoices then being raised to the customer. For example, if a company fails this Friday, the weekly timesheets will not have been signed or received and the invoice will not have been raised, therefore there is no confirmation of debt and this week’s sales will be lost. With this clause, an administrator can sign off this week’s time sheets and the recruiter can raise an invoice after the insolvency which means that this week’s sales are covered.
- Insurers can cover a specific account or a selection of top end concentrated risks on a ledger providing the client with peace of mind that they are covered on their larger balances. For example, it could be a client selling garments to retailers, they may have small balances with smaller boutique type customers but larger concentration risks with on-line retailers or high street stores who are placing larger orders and bring more catastrophic risks with that.
- Policies can include Binding Contract Cover whereby credit limits are protected for 3-6 months where the client is in a “binding contract” with their customer. This is particularly relevant in construction where the client is in a legally binding contract with the contractor and cannot pull off site if any adverse information is apparent.
