Insolvent contractors can put a company in serious trouble, including bankruptcy. Even a few unpaid invoices can lead to payment blockages and trigger a cascade of financial difficulties. These situations can be prevented by choosing financial services that enhance the protection of your business in its dealings with payers.
Payment blockages occur when contractors do not settle invoices on time. If you don’t react promptly, loss of cash flow and accompanying debts are just a matter of time.
The risk of payment blockages is an inherent part of running a business, but it can be minimized. Verifying a potential business partner can protect you from risky cooperation and its consequences. After signing a contract, you can support payment security in two ways, with factoring or receivables insurance.
If your potential contractor has had payment problems in the past or currently faces them, working with them involves significant risk. You can check their financial situation in public business registers or with the help of commercial intelligence agencies, which, for a fee, will scrutinize the company and issue an opinion on its credibility. According to the maxim “better safe than sorry,” it is worth investing in verification to avoid future losses.
Factoring allows you to receive payment for an invoice quickly, often within minutes. In this service, the factor (service provider) pays you the invoice amount and then collects the payment from the invoice payer.
Full factoring involves financing all invoices from a specific contractor. At Transcash, we offer it in a non-recourse variant, which protects you from the consequences of payer insolvency.
Recourse refers to the situation where the factor, who did not receive payment, returns to the client for the return of the money paid. This situation occurs when you opt for recourse factoring. At Transcash, non-recourse factoring is offered as full factoring, with the condition that to protect against insolvency, you need to purchase insurance for the service. As a result, the service is more expensive, but you don’t have to worry about whether the contractor will pay. If they turn out to be insolvent, the costs can be covered by the insurance policy.
The guarantee of quick payment of receivables at a relatively low cost of factoring allows for maintaining cash flow and avoiding payment blockages. By choosing full factoring at Transcash, you can count on high financing limits tailored to your company’s needs and transparency of fees
Receivables insurance is another way to avoid problems with insolvent contractors. It allows you to obtain compensation in case the contractor fails to meet their obligations, provided the circumstances of this event are covered by the policy. Unlike the relatively simple full factoring, receivables insurance involves extensive formalities and can be costly.
The premium amount, the basic fee arising from the contract, depends on the company’s turnover. The larger the turnover, the higher the insurance premium will be. In the case of receivables insurance, you must also consider the costs of debt collection and the risk assessment fee, which at Transcash are free.
The lengthy process of claim processing and the long wait for payment also work against this insurance. Of course, this is provided that recovery is successful because the conditions under which the insurance covers receivables repayment are strictly defined in the contract. Some policies allow full repayment of overdue amounts only if the debtor declares bankruptcy. Before deciding to purchase receivables insurance, it is worth thoroughly reviewing the conditions under which you will receive compensation.
In times of poor economic conditions, which the TSL industry is experiencing, the role of quick and efficient payments is growing. That’s why it’s worth securing your interests with appropriately selected financial services. Non-recourse factoring supports your company’s cash flow and protects you when you encounter a problematic payer.
