As featured in The Business Times
The discussion around invoice financing and credit insurance has increasingly focused on whether recent failures are due to flaws in the products themselves or the conduct of those using them.
The analysis suggests that the issue lies less with the structure of these financial tools and more with how they are applied in practice.
Background and Context
The collapse of Greensill brought significant attention to the role of credit insurance in invoice financing structures.
Credit insurance is designed to protect against non-payment by a buyer, making receivables more attractive for financing and investment.
When combined with invoice financing, these instruments can create a compelling funding model, particularly when backed by receivables from highly rated counterparties.
However, recent events have shown that these structures can become vulnerable when not properly aligned with the underlying trade reality.
Product vs Conduct
A key takeaway from the analysis is the distinction between product design and user behaviour.
Invoice financing and credit insurance remain fundamentally sound when applied to genuine transactions.
Problems tend to arise where:
• underlying trades are weak, fictitious, or poorly understood
• receivables are structured without proper verification
• reliance is placed on form (documentation or insurance) over substance
In such situations, the risk is introduced through conduct rather than the financial instruments themselves.
Misalignment of Risk and Structure
The Greensill case illustrates how misalignment can occur.
Receivables were packaged, financed, and insured in ways that created the appearance of low-risk assets, but without sufficient linkage to real economic activity.
This disconnect between structure and underlying trade increases the likelihood of systemic failure when assumptions are tested.
Role of Credit Insurance
Credit insurance plays a legitimate and valuable role in mitigating payment risk.
However, it is not intended to function as a guarantee or replacement for due diligence. Its effectiveness depends on accurate disclosure and proper alignment with the underlying transaction.
Over-reliance on insurance may create a false sense of security, particularly where risks are not fully understood at the outset.
Implications for the Market
The analysis highlights a shift in market thinking.
There is increasing emphasis on:
• verifying the authenticity of underlying trades
• aligning financing structured with real commercial activity
• maintaining robust due diligence regardless of insurance cover
Market participants are recognising that sustainable financing depends on substance over structure.
Conclusion
Invoice financing and credit insurance are not inherently problematic. Rather, recent failures demonstrate the consequences of misusing these tools without sufficient regard for underlying trade realities.
The effectiveness of these instruments ultimately depends on disciplined application, transparency, and a clear understanding of the risks they are intended to manage.
Read the full article at The Business Times https://www.businesstimes.com.sg/opinion-features/columns/invoice-financing-and-credit-insurance-problem-product-or-conduct