Funding the Receivables Book: Hold, Insure or Discount

How to read this sheet

The return on released capital is the input that decides almost everything here and it is the one most often entered wrongly. If the bank limit is slack, a freed rupee earns the borrowing rate and nothing more, so put the borrowing rate in and expect insurance to look expensive. If the limit binds - if orders are being turned away or run on job work because the money is not there - a freed rupee earns whatever the last rupee of the limit is earning, which is a contribution figure and not an interest rate. The capacity sheets in this bundle compute it. Entering the bank rate on a mill that is limit-constrained will systematically under-value both insurance and discounting. Read the crossover column as the real verdict. A buyer whose crossover is negative pays for cover on the loss alone and should be insured whatever the state of the limit. A buyer whose crossover sits above the return on released capital is not a credit decision at all - insuring them is buying limit at that rate, and it should be compared against every other way of buying limit rather than against the premium. The seeded mass retailer is the largest and nearly the safest name on the book and needs twenty-one per cent to justify a policy. What is not modelled. Insurers price per buyer and per country and rarely at one blended rate, and a policy is usually whole-turnover rather than name-by-name, which limits how far the book can genuinely be split - treat the mixed plan as the target and the policy structure as the constraint. Discounting is treated as without recourse; with recourse the loss stays on the book and the comparison changes materially. Nothing here prices the relationship consequences of factoring a buyer who would rather you did not, the administrative load of running three arrangements at once, or the political and transfer risk that sits behind a country rather than a name. And the probability of failure is an annual figure applied to a full year of sales, which is right for a steady book and wrong for one that is concentrated into a season.