Recourse Factoring Vs. Non Recourse Factoring…. Which is right for you?
Businesses that have a recourse factoring agreement are responsible for buying back invoices that are not paid by the account debtor (the company that owes the money) after a specified period of time, usually 60, 90 or even 120 days. It means even though the factoring company has purchased the invoice and advanced on it, they still have “recourse” at some point.
Most factoring companies provide credit checks through various credit agencies to help minimize the charge-backs (recourse) and to help businesses make good credit decisions. These credit checks can be done on current accounts or on new accounts they hope to have business with in the future. Recourse factoring offers the factor the least amount of risk and discount fees are generally lower making it a more affordable option for a business seeking to factor.
For non-recourse agreements, the factor assumes the risk of non-payment by the account debtor, regardless of the reason. Non-recourse factoring keeps the business from assuming bad debt but is riskier for the factor. Discount fees are considerably higher than for recourse factoring. In some cases, if a business has a concentration of invoices with just a few large customers, non-recourse factoring may protect the business from potentially large offsets.
So when deciding on which type of factoring is best for your company, evaluate your customers, your cash flow needs and just what expense your company can afford.
The Importance of Small Business to the Economy…
A small business is considered to be a company that employs less than 500 people and more often ranges from 50-100. U.S. small business makes up over half of the country’s workforce. While many people think big corporations and industrial giants are what drive the economy, small business is actually the workhorse.
Small business in America has been the stabilizing force in the economy for years. Entrepreneurs are the cornerstone of creativity and production. Small business is what stimulates economic growth and keeps our economy moving. Over 60% of all private sector jobs come from a small business making small business critical to the U.S. economy.
Some interesting facts about small business include:
- There are 28 million small businesses in the U.S.
- 70% of small businesses are owned and operated by a single person
- Small companies hold over ten times more patents in the United States than their larger counterparts
- 1/3 of small businesses rely on credit for financing
- 60% – 80% of all new jobs come from small business
The Small Business Association “SBA”, a government agency watches out for small businesses in America by helping them to stay in business. They offer education and training when needed, and assist small business owners with finding alternative funding sources. The SBA tracks data and statistics about various small businesses and reports this information to the United States government.
So the next time you think small business is too small to matter think again….
Factoring… A look back
Ever wonder how or why factoring or accounts receivable financing came to be? Oddly enough it goes much farther back than you might think.
Factoring dates back to the financing of trade, particularly international trade. It is said factoring originated in the far- east and China, particularly in the spice trade. The ancient Romans also used factoring, selling promissory notes at a discount. Though factoring in its purest form may have been used by these two cultures, it was a not terribly commonly .
Factoring gained popularity around the time of the American Revolution when colonial merchants sent raw materials like cotton, fur and timber to British and European merchants. Because of the great distance across the Atlantic Ocean, waiting for payment from Great Britain and Europe caused delays in processing orders. As a solution, the merchants paid the colonists in advance in order to have the means to process new orders. This form of factoring provided cash flow for the colonists and allowed them to ensure that trade was uninterrupted.
As the business world progressed so did factoring. The focus of factoring shifted to the importance of credit during the Industrial Revolution taking into consideration the customer’s credit worthiness. Businesses could now use the amounts owed them as instruments of payment based on their credit worthy, established customers.
During the 1930’s factoring grew considerably among the garment and textile industries which relied on raw materials. Factoring was commonly used to ensure that companies were able to purchase these materials to produce clothing and textiles without delays.
Today, factoring is a respected alternative to traditional financing. Many businesses large and small sell their accounts receivable to obtain much needed working capital. Nearly any business with credit worthy customers can take advantage of factoring as a steady source of cash flow for daily operating expenses, to purchase new equipment or growth.
Having transitioned into the new year, 2014 will undoubtedly bring many challenges for small business owners. One of these challenges is finding the right sources of capital to fund their business. A key to running any business is to always know where you are financially. All too often company finances go overlooked until too late. Don’t wait to the last minute to find the right financing tool.
There is an abundance of financing options for small businesses, factoring being one that is making a resurgence. Factoring companies can vary dramatically in what they offer so make sure to know the facts before you commit.
When looking for a factoring relationship remember the “Who, What and When”.
Who is the best factoring company for my business:
Look for the number of years a factoring company has been in business. Factoring companies with more than 10 years in the business generally offer a good program. Companies with 20 plus years are doing something right and it indicates they likely have a very solid reputation. Look for a factoring company with a tenured management team and sales force. Get to know the people you will be working with because it DOES make a difference. Relationships are key, especially when dealing with what can be stressful financial matters.
What factoring program is right for my business:
Most factoring companies have similar programs but it’s how they work with the business owner that matters. Many factoring companies have industry expertise in areas such as trucking, medical and staffing that could be beneficial for the business owner. When selecting a factoring partner focus on companies familiar with what you do.
When should you work with a factoring company:
If slow cash flow is preventing you from meeting you obligations on time it may be time to factor. Most companies experience slow paying customers from time-to-time but if it has become the norm, factoring could be the answer. Factoring is usually a short-term resolution for businesses, anywhere from one year to eighteen months. Most businesses usually become eligible for more traditional financing after they have been a factoring customer.