Trade Credit Insurance vs. Guarantee Factoring — Choosing Buyers, Percentage Paid, Cost and When to Use Each

There are two main external ways to protect against being unable to collect receivables because a buyer fails: trade credit insurance, written by insurers, and guarantee factoring (also called receivables guarantee or collection guarantee), offered by factoring companies. Both pay a certain amount when a buyer cannot pay, but they differ in how the covered buyers are chosen, the percentage paid and the unit of contract.

This article sets out the differences based on public material from credit insurers and bank-affiliated factoring companies. Products vary by provider, so it focuses on the typical structures shown in public material.

Where each fits

Trade credit insurance is an insurance contract written by non-life insurers and credit insurers. The policyholder pays premium and receives claim payments for losses caused by a buyer's insolvency or late payment beyond a set period.

Guarantee factoring is a contract under which a factoring company guarantees the buyer's payment. The client pays a guarantee fee and receives payment within the guarantee limit when the buyer cannot pay. It is a different product from factoring that buys receivables for cash (purchase factoring), and does not assign the receivables to turn them into cash early.

Comparison table

* A summary of typical structures shown in each company's public material. Individual products may differ.

Difference 1: choosing the buyers

The biggest difference is how the covered buyers are chosen.

Bank-affiliated factoring companies explain that guarantee factoring sets a guarantee limit for each customer, and the client can choose which customers to cover. If you are worried about just one buyer, you can cover only that buyer. Some products, however, require a minimum size. One factoring company's public material gives guidelines such as: for a scheme guaranteeing several buyers together, 10 or more buyers, total guarantees of JPY 50 million or more and a contract term of one year in principle; for a scheme guaranteeing buyers individually, 5 or more buyers and JPY 2 million or more per buyer.

Trade credit insurance is based on whole turnover policies covering many buyers together. Because insurers are wary of policyholders insuring only buyers with credit concerns, they generally require the scope to be defined by objective criteria such as "all buyers" or "the top N buyers by balance". Policies covering selected buyers or a single buyer exist, but fewer insurers write them and terms are more limited.

This difference also shows in the cost structure. A guarantee focuses on the buyers you are worried about, so the rate per buyer tends to be higher. Insurance spreads risk by including sound buyers as well, which keeps the overall rate down. Which is cheaper depends on how many buyers you want to protect, and for how much.

Difference 2: percentage paid

Guarantee factoring is described as paying 100% of the receivable within the guarantee limit.

In trade credit insurance, according to credit insurers, the claim is calculated as the lower of the loss on the insured receivable and the credit limit, multiplied by a pre-set insured percentage. With 90% cover, 10% of the loss remains with the policyholder. Some policies also set deductibles or a maximum liability.

However, under either structure, nothing is paid above the limit. For a buyer owing JPY 30 million with a limit of JPY 10 million, the maximum payment is JPY 10 million under both guarantee and insurance (under insurance, that amount multiplied by the insured percentage). Whether you can get the limit you need affects the outcome more than the difference in percentage.

Difference 3: what triggers payment

Trade credit insurance covers formal insolvency proceedings and also non-payment continuing for a set period after the due date (protracted default). Credit insurers give examples where non-payment for six months or more after the due date is covered. For export sales, political risks such as import restrictions, foreign exchange restrictions and war in the buyer's country are also covered.

The events that trigger payment under guarantee factoring are set in the guarantee contract. They center on the start of formal insolvency proceedings, but how far simple late payment is included varies by product. When applying, check in the contract which events trigger payment, and when.

Under either structure, receivables that are unpaid because of a dispute with the buyer over quality or delivery are in principle not covered. Only receivables where the buyer's obligation to pay is undisputed are covered.

Difference 4: limit reviews and information

Credit insurers keep monitoring buyers during the policy period and revise limits as their credit standing changes. Mid-term reductions or cancellations are a burden for the policyholder, but they also signal changes in the buyer's credit standing. Under a whole turnover policy covering many buyers, bringing the insurer's reviews into your own credit management is one of the functions included in the premium.

Under guarantee factoring, too, the factoring company reviews each buyer and sets a guarantee limit. Bank-affiliated factoring companies explain that guarantee limits can be increased or reduced and that information on buyers' credit standing is provided. As with insurance, the limit set may not match the amount requested.

When to use each

Points to watch when combining them

The two can be combined. For example, a whole turnover trade credit policy can protect the portfolio while guarantee factoring fills the gap on key buyers whose insurance limit falls short. Some companies take a guarantee only for amounts above their internal credit limit.

When combining them, check the following:

• Treatment when both cover the same receivable: each contract sets how payment is adjusted when other insurance or guarantees exist, and whether they must be disclosed. Inform both providers in advance.
• Why the insurance limit was not granted: if the reason is concern about the buyer's credit, a guarantee may also be refused or priced higher. If the reason is the insurer's accumulation (its total exposure on that buyer), it makes sense to look for another provider.
• Administrative workload: limit management, notification deadlines and claim procedures differ by contract. Make sure the team responsible can run them.

Order of evaluation

1. List each buyer's outstanding balance and check concentration in your top buyers
2. Decide the scope to protect (the whole portfolio or specific buyers)
3. Check whether each option can provide the limits needed on key buyers
4. Compare the amount actually recovered, including percentage paid, deductibles, triggers and timing
5. Compare annual cost and internal administrative workload

Comparing rates first makes it easy to reach the wrong conclusion. Step 3, whether the limits will be granted, can only be known by applying, and it is the core of the comparison.

How Credit Hills can help

Credit Hills is an insurance broker specializing in trade credit insurance. We do not offer guarantee factoring, but we advise companies already using guarantees on switching to or combining with insurance. After hearing about your buyers and balances, we will tell you frankly what insurance can and cannot cover well.

See our trade credit insurance services →　What is trade credit insurance (insight) →

References (in Japanese)

• Mitsubishi UFJ Factors — Receivables guarantee
• Mizuho Factors — Domestic factoring (payment guarantee)
• Atradius — Credit insurance FAQ (protracted default, claim calculation)