Factoring is a process where you sell your invoices in exchange of immediate payment at a discount. Factoring companies keep the payable invoices and the business houses get cash immediately. It is a quicker, easier and better way to avoid long or short- term debts. Invoices act, as equity for almost all businesses but to get working cash flow is easily feasible through recourse and non- recourse factoring. So, while starting a business you have to keep a few things in mind, which are more important than your cash equity. Some of the things, which are counted as equity, are cash in hand, line of credit and invoices.
So lets find out what recourse and non- recourse factoring is all about. When you use an invoice factoring, it is advisable that you should be aware of certain terms and conditions such as “who would be responsible for debts when customers are unable to pay?” But if you have recourse factoring, then the factor will not take the burden of the debts and will just collect the amount from you if the invoice is unpaid.
Recourse factoring is considered lower cost factoring as you continue to take the risk of the bad debts instead of surpassing them to the factoring company. This factoring is much easier to attain and the invoice factoring also has less stringent rules about your business systems and the payment history of your clients. But if you have unreliable clients then you may have to pay back the amount along with the normal fees and interest. Thus, it is advisable to weight all facets of the situation before you opt of any type of factoring.
Non-recourse financing is quite similar to recourse financing. But in non-recourse financing the financing company is held liable for receiving payment from the payable invoice. The factor accepts specific risks such as total disappearance but doesn’t insure against slow payment. This is the main reason that non-recourse factoring is more expensive. In non-recourse factoring you don’t have to refund the advance to the factor but you should pay interest for the specific period mentioned in the factoring agreement. The factor takes all the rights to pursue the customer for the payment. It includes the right to take legal action also.
Both, Recourse and non-recourse factoring are quite popular and most of the companies these days offer both these services to customers as both have proved to be the viable option to meet the cash requirements for small as well as big businesses.
Thus, it is very important to choose the best factoring keeping the current state of business in mind. Similarly, it is very important to choose the appropriate invoice factoring company. You may find some factors charge low fees but offer you lower levels of customer service also, now this may end up being more expensive in the long run. Factoring companies have their own requirements and whether a financing company is just right for you or not, could be found out by directly interacting with them.