Invoice factoring is great for businesses looking to cover payroll, invest in inventory, or pay daily business expenses. With invoice factoring, businesses can sell their pending invoices to a third-party company (factor/lenders) in exchange for 80% to 90% of the invoice value, minus a small transaction fee. Once you’ve decided to use invoice factoring, the next step is to choose between factoring with recourse or factoring without recourse.
Factoring with Recourse
According to the International Factoring Association, 88% of the invoice financing industry practices factoring with recourse.
Recourse factoring is relatively cheaper than non-recourse financing because factoring companies only assume a portion of the invoice value. You can choose recourse factoring to save money, but you have to make sure your clients have a great credit history.
If your clients refuse to pay within the agreed period, your company will be held responsible. The factoring company can charge in invoices back to you. You can either pay it back or replace the invoice with another invoice of the same value.
Factoring Without Recourse
According to the Global Funding Resource, over two-thirds of businesses using invoice factoring choose non-recourse factoring over recourse financing making it the most popular type of invoice financing.
In factoring without recourse, factoring companies assume the full responsibility of the invoices – whether it gets paid or not, it’s on them. Once the invoices are sold under non-recourse factoring, you don’t have to deal with those invoices again.
Non-recourse factoring companies are responsible for collecting payments so you don’t have to. You’ll be able to focus more on running your business efficiently than chasing customers. In fact, many business owners choose non-recourse financing solely for the benefit of delegating debt collection tasks.
If you lack the time, money, or resources to collect on invoice payments, you may want to elect to go with non-recourse factoring.
Non-recourse financing is more expensive than recourse mainly because the factor assumes 100% of the risk. For instance, a factor may charge 3% on invoices under recourse factoring, while non-recourse factoring fee would be 4%.
On hindsight, non-recourse factoring sounds like the perfect option but not all factoring companies offer non-recourse factoring. For companies that do offer non-recourse factoring, there are usually multiple stipulations under this type of agreement.
Your Bottom Line
The industry you are associated with may influence your choice between non-recourse and recourse factoring. For example, it’s generally understood that a majority of transportation and freight companies prefer recourse financing. You may want to look for a factoring company that offers both recourse and non-recourse factoring. But regardless of the type of factoring you choose, make sure you speak with only reputable factoring companies and then compare the terms each offers.
If you want to know more about factoring with recourse or factoring without recourse and how it can help you and your business, contact our experts at SMB Compass.
Our finance specialists are more than willing to spend whatever time is necessary in order to answer all of your questions. By the way…you are under no-obligation. Our time is your time. Call us now via phone call at (888) 853-8922 or email us at firstname.lastname@example.org.