Understanding the Terms
When looking for a factoring company, it is important to research several competent factoring firms and compare their terms. This is an important step to take regardless of whether you are looking for recourse or non-recourse factoring. Consider working with a factor that provides both types of factoring. Some of your clients may make better candidates for recourse factoring than others.
Factors with a competent credit team can help your business deal with customers with poor payment histories. A good factoring company can help you make significant reductions in your losses due to non-payment by assisting you in analyzing the credit of your customers before you start the work or deliver goods.
How to Use Factoring for cash flow
Recourse Factoring involves pledging a company’s invoices in exchange for an immediate cash advance. Any non-performing accounts receivable must be paid off by the company or the owners should the factor request payment of the non-performing accounts.
Nearly all factors are recourse to avoid the risk of unpaid accounts. Recourse factoring has several advantages for lenders. Lenders in this arrangement face minimal risks. The factor does not have to deal with risks of non-performing accounts receivable.
Many lenders find recourse factoring more advantageous because the owners have provided them with a guarantee of payment when accounts receivable becomes non-performing. On the other hand, the borrower faces greater risks because they are responsible for all uncollected payments.
Clients often find non-recourse factoring beneficial. However, this type of factoring requires the factoring company to absorb all the debts or uncollected invoices. It is less risky for management because if they provide the service properly or deliver the product as agreed they do not have to repay the factor for non-performing accounts receivable like they would under a recourse factoring agreement.
Which Type of Factoring is Suitable for my Business?
There are advantages and disadvantages of both recourse and non-recourse factoring. In general, companies with creditworthy customers and strong balance sheets face less risk regardless of whether they choose recourse or non-recourse factoring. Every business is unique as far as dealing with collecting from customers. It is important to consider the benefits and drawbacks of both recourse and non-recourse when factoring your invoices to decide which will better meet your business needs.