Non-Recourse or Recourse Factoring Companies
With small businesses that have very few available resources to run their business, finding additional working capital can be quite difficult (like trying to fund investment property). This difficulty is mostly due to the fact that working with large financial institutions can be a hassle when your company is just starting out. In order to avoid long waits and high interest rates some small businesses opt to go through factoring companies. They give their invoices to these third party factors and in return they will be provided with immediate cash that serves as capital for small business. However, business owners sometimes don’t understand that there are several ways to setup a factoring contract. Two of the most important terms to know are recourse factoring and non-recourse factoring.
Invoice factoring is a legitimate way to provide cash flows for a business. But mostly factoring companies only provide these services to companies that have high markups and are growing business that need extra cash for expansion. These finance companies vary in their agreements and companies must be sure of these agreements if they are to avoid big mistakes.
In recourse factoring, if the debtor isn’t able to pay for their debts the factoring company will have all the rights to go back to the company and take back the advance payment they provided for the company. The risk of bad debt in this type of arrangement lies completely with the company selling the invoices. The company must give back the money to the factoring company including the factoring charges if a customer doesn’t pay. This type of contract is low risk for the factor and thus they usually offer lower fees and charges.
With non-recourse factoring the risk of bad debts lies with the factoring company and the advanced money cannot be revoked. In a situation where the debtor cannot pay their unpaid balances, the factoring company cannot go back to the company and take their money back. With non-recourse factoring, the risk is higher for the financing company thus the charges are usually high compared to recourse factoring.
When choosing what service is best for the company there are a lot of items to consider. Usually recourse factoring is better when the company is confident that their debtors can pay their accounts. They are able to pay the lower fees associated with recourse agreements. However, non-recourse factoring may be best when the customer’s financial capability is quite uncertain. This way the company will not have to bear the risk of nonpayment, although they have to pay for higher factoring fees.