Recourse Factoring vs Non-Recourse Factoring
Factoring, or accounts receivable financing is an alternative to traditional business loans. Businesses owners with cash flow challenges often turn to factor to solve this problem. Factoring their invoices enables the owner to purchase inventory, make payroll and cover administrative costs while waiting for their customers to pay.
The factoring company buys the owners invoices funding a large percentage of the total invoice to the business within 24 hours. Upon payment of the invoice by the customer, the business receives the balance, called a reserve, less agreed upon fees.
It is important when considering factoring to understand that there are two types of factoring: Recourse and Non-Recourse.
Recourse Factoring
Recourse factoring occurs when a business sells invoices to the factoring company and agrees to pay back monies from any uncollected invoices to the factoring company. This is beneficial to the business if they feel confident in their customer’s ability to pay. Rates for this type of factoring is generally lower since the factoring company is not assuming all of the credit risk.
Non-Recourse Factoring
Non-Recourse factoring follows the same concept of selling invoices, however, the factoring company assumes the risk of non-payment due to bankruptcy. The owner selling invoices to the factoring company is still liable if their customer does not pay the invoice for any reason other than bankruptcy. Rates for this type of factoring generally are higher, due to the factoring company having more risk.
When deciding on factoring, weigh the benefits of Recourse vs. Non-Recourse. A good factoring company will do due diligence and will have a thorough understanding of the invoices they are purchasing. Discuss the best options based on your customers, their creditworthiness and the value of the invoices. This will help you, the business owner to decide which type of factoring will be the most beneficial for your business.
Have more questions about recourse and non-recourse factoring? Give us a call or contact us by email to learn whether either of these options is right for your business.
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