Not to mention, you want to ensure that you and your staff are safe and healthy. Managing cash flow, payroll, and other expenses becomes difficult when business slows dramatically. 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.With COVID-19 and quarantine, it’s a challenging time to manage a small business. Every business is unique as far as dealing with collecting from customers. In general, companies with creditworthy customers and strong balance sheets face less risk regardless of whether they choose recourse or non-recourse factoring. There are advantages and disadvantages of both recourse and non-recourse factoring. Which Type of Factoring is Suitable for my Business? 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. However, this type of factoring requires the factoring company to absorb all the debts or uncollected invoices. On the other hand, the borrower faces greater risks because they are responsible for all uncollected payments.Ĭlients often find non-recourse factoring beneficial. Many lenders find recourse factoring more advantageous because the owners have provided them with a guarantee of payment when accounts receivable becomes non-performing. The factor does not have to deal with risks of non-performing accounts receivable. Lenders in this arrangement face minimal risks. Recourse factoring has several advantages for lenders. Nearly all factors are recourse to avoid the risk of unpaid accounts. 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. Recourse Factoring involves pledging a company’s invoices in exchange for an immediate cash advance. 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. Some of your clients may make better candidates for recourse factoring than others.įactors with a competent credit team can help your business deal with customers with poor payment histories. Consider working with a factor that provides both types of factoring. This is an important step to take regardless of whether you are looking for recourse or non-recourse factoring. When looking for a factoring company, it is important to research several competent factoring firms and compare their terms. However, it is important to know that not all factoring companies purchase accounts receivable on a non-recourse basis. Non-recourse factoring is the best choice if you are risk-averse. Since the Factor is taking on more risk in a non-recourse transaction, to qualify the company’s customer, they must have an extensive history of prompt on-time payments and meet the credit requirements of the Factor. Advance rates may be lower and factor fees may be higher when compared to recourse factoring. Non-Recourse Factors are often compensated differently for taking the credit risk away from the company. In a non-recourse arrangement, the Factor assumes the credit risk and liability of non-payment on a factored invoice. Non-Recourse FactoringĪ Factor that executes an invoice purchase agreement with a company without asking the company to repurchase unpaid or past due accounts receivable is automatically non-recourse. Recourse Factors can offer higher advances and lower factor fees when purchasing the invoices under recourse factoring facilities. Any invoice that is non-collectible or in dispute is sold back to the company. The company is still ultimately liable for the invoices if they remain unpaid past their due date. Typically recourse factoring requires the personal guarantee of management or the owners because the owners must maintain liquidity to purchase back any non-performing accounts receivable taken as collateral by the Factor. Recourse FactoringĪ company that factors with recourse is one that works with a Factor that lends against the accounts receivable using them as collateral to advance funds. While both provide consistent cash flow, it is important to know the difference between the two before making a decision on how to fund your company’s working capital needs. Factoring can either be recourse or non-recourse.
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