Factoring can be an excellent way to obtain cash for your business when cash flow is low. Many business owners avail themselves of this option for a variety of reasons, such as that the requirements to qualify for this type of financing are less stringent than for traditional bank loans, for example.
Although you may have heard of this type of funding for your business, you might not be aware that there are two basic types of factoring: recourse factoring and non-recourse factoring.
Understanding the Basics
Factoring is an agreement between a client and a factoring company (also referred to as a factor). The factor agrees to take on the outstanding invoices owed a client by that client’s customers. The factor pays a sizable percentage of the money owed on those accounts up front to the client. When the client’s customers pay the accounts in full, the factor pays the remaining balance owed to the clients (less factoring fees).
The Difference Between Recourse and Non-Recourse Factoring
People who have never entered into a factoring contract may bear a false assumption about non-recourse factoring versus recourse factoring. They may assume that if the client’s customers do not pay off their debts in full, the factor will absorb the resulting cost. This is generally not the case. With non-recourse factoring, the client must still pay back any outstanding debt on the part of the client. This generally must be done if the invoices are not paid within a certain time frame (such as 90 days). Typically, the exception to this rule is when a customer claims insolvency, but this must happen within that 90-day window.
This type of factoring is generally less complicated to implement. It is a straightforward agreement that if any of the invoices taken on by the factor are not paid within the 90 days, the client will pay back the remainder of what is owed.
Customers might not pay their invoices for different reasons, such as credit issues or that they dispute the charges. Since disputing the charges owed is the main reason for invoices not being paid to a factor, the best strategy for a client is to lay out the terms of an invoice clearly with its customer. This can greatly reduce the amount of invoices that go unpaid.
If you are looking for ways to secure the necessary financing for your business, Integrity Financial Capital can help. Contact us today for more details on whether recourse factoring might be a good choice for you.