Insuring against non payment


If after doing the necessary credit checks, after loaning someone some money, they don't pay it back after a period (how long would this need to be?) is there a way I can indemnify my business against the loss/bad debt?

Does anyone know what magnitude the premium would be or how this kind of insurance works?

I presume it would be a percentage against a lump sum? eg. $X per annum premium for losses u $Y?


Insurance Finance Payments Business

asked May 16 '11 at 07:13
11 points
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4 Answers


I think what you are looking for is called factoring. A factoring company will buy your accounts receivable from you. They will discount their fee based on the creditworthiness of your customer.

answered May 16 '11 at 11:00
Kenneth Vogt
2,917 points
  • Non-recourse factoring tends to be relatively expensive (compared with other methods of financing). Plus, it sounds like Ryan doesn't necessarily need cash advanced against his invoices. – Marcin 13 years ago


Insurance would want to be dealing in rather large numbers because then they are liable for your mistakes ... if the client doesn't agree the work is complete and you think it is ... Its not a good position for the insurer.

You have a few options:

  • Factoring which there is a collection agent who bills the client on your behalf, they pay you 80% straight away and make their money chasing the remainder.
  • Escrow, where you have a lawyer / agent who is a netural third party. They pay the escrow amount (up to 100% but could be less) upfront, then when you hand over the deliverable to the agent they release the money to you.

We run with a basic system of 25% upfront, define a range of deliverable points where they sign off the progress and pay another X% and allow the client to hold 10-20% over us on delivery so they feel in control.

Use use leverage points like stopping service, not doing any more updates for our custom development and for the products we have a trial license that lasts 90 days ... when they pay the final they get the full license key.

Basically where possible break the delivery up into smaller deliverables ... get paid for the smaller bits as you go.

answered May 16 '11 at 11:22
Robin Vessey
8,394 points


loaning someone some money

This sounds like a cash loan to an individual. Nobody is going to insure this - it would be too easy to run a scam. For instance, you could "loan your friend" $100,000, and take out a policy for a $10,000 premium. Then your friend "doesn't pay you back and disappears", and the insurer pays you $100,000. You've just scammed the insurer for $90,000.

If you're going to "loan someone some money" and you have doubts about whether they'll pay you back, your best bet is to get collateral, and be ready to lawyer up if needed. I prefer to leave lending like that to the professionals, aka banks.

Rob and Kenneth Vogt mentioned factoring. That doesn't apply to cash loans, or loans from or to individuals. It purely applies to business-to-business sales, and it's not really a form of insurance. Instead, you sell some or all of your receivables to the "factor" at less than the face value. In determining how much less than the face value you'll get, the factor will take into account your creditworthiness, the other party's creditworthiness, the size of the transactions, and the other party's payment history to you. They may simply decline to buy receivables that are too sketchy, in which case you'll be stuck with them.

answered May 16 '11 at 12:02
Bob Murphy
2,614 points


You are looking for an underwriter to underwrite your loans, essentially. That is a method of financing your loan portfolio, and spreading around the risks and rewards.

Alternatively, you can use collections agents to collect on your behalf, or various types of business that will buy the debts out (non-recourse factors, for instance). They will buy the debt out at a discount.

The normal way of preventing a borrower from defaulting, and ensuring decent recovery if they do, is by having them provide collateral (under which I include a repayment bond). A repayment bond is something like what you are looking for, but it is usually purchased by the debtor in lieu of collateral.

Anyway, why are you not just taking collateral? And why are you planning on entering the money lending business if you don't know this stuff? Finally, you do realise there may be licensing requirements for money lending businesses where you are?

answered May 16 '11 at 16:40
526 points

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