The Contrast Between Recourse and Non-Recourse Factoring


The Benefits Of Factoring Invoices 

The main and most important benefit of a business factoring invoices is that it helps the business to take on new business. Factoring also increases cash flow for payroll and it also increases cash flow for a business’s operating expenses. When businesses outsource factoring companies to do their back-office work the job of the factoring company is to manage the company’s collections that they have on any invoices. The way that the factory company goes about collecting the debt that is owed depends on the factoring agreement that the business has with the factoring company. 

Recourse Factoring And Non-Recourse Factoring 

There are currently two main types of factoring that businesses use to collect debts. They are resource factoring and non-recourse factoring. The most common use of these two types of factoring is recourse factoring. When a company uses recourse factoring what this means is that if the factoring company is not able to collect on a debt the business must buy back the invoice and they will be responsible for the non-payment of the invoice. Non-recourse factoring is when the factoring company takes on most of the responsibility and risk of non-payment for invoices by customers. All because non-recourse is used it does not mean that the company is relieved of all responsibility. There is usually some type of non-recourse agreement in place between the company and the factoring company that states who will be responsible for what in case there is an invoice that is not paid. 

In many cases, non-recourse is offered to companies by factoring companies if the debtor files for bankruptcy. In order for the debtor who is filing for bankruptcy to be eligible for non-recourse, they have to have a good credit rating. If the debtor that is filing for non-recourse does not have a good credit rating they will not even be considered for a non-recourse agreement. The reason why the individual who has bad credit will not be considered for a non-recourse agreement is that they are considered high risk for non-payment. 

The Attributes Of A Good Factoring Company 

When a business is looking for a factoring company they should find multiple that are reputable and schedule a sit down so they can discuss the terms that are associated with recourse or non-recourse agreements. The company should not just look for a company that offers one of the services but you should look for reputable companies that offer both recourse and non-recourse agreements. One key attribute that a business should look for in a factoring company is one that has a strong credit team. This is important because this type of factoring company is experienced with credit and will not waste their time working with customers that have payment histories. 

A good factoring company will always be very diligent to try and collect any invoices that are owed to a company that has contracted it. A good factoring company does not care what type of account it is or how big the account is; they are solely focused on collecting the invoice. The process for debt collection is as follows: the factoring company has to send out an invoice to the debtor. Once the invoice is sent then the factoring company is allowed to start making collection calls 40 days after and these collection calls can continue for several weeks. If the factoring company is unable to collect payment for the invoice within 90 days then it may be returned back to the company. If the invoice is returned to the company the factoring company will work out an agreement to get the cost covered and it will not hurt the company financially.