Want to Solve Cash Flow? See How, With Recourse vs. Non-Recourse Factoring
When it comes to needing quick access to cash flow, organizations often turn to factoring their invoices. Selling its account receivables at a discount to a third-party commercial financial company, the “factor” allows businesses to tap into cash instead of waiting for customer payments.
Know your options before you choose a factor
When it comes to choosing factor financing, there are two options to consider: Recourse and Non-Recourse Factoring.
1. Non-Recourse Factoring
If you have a non-recourse agreement, your factor assumes the risk of non-payment by your customers. Non-recourse factoring also protects your business from the cost of bad debt. Non-recourse factoring is typically the same cost as Recourse factoring. Although there may be a slight premium for high risk accounts or international sales. In a situation where a high percentage of your business comes from a few large customers, non-recourse factoring protects your business from the negative impact you could experience from a customer’s inability to pay.
If you’re a wholesale or distribution business, Accounts Receivable may be your largest asset—and one that you should protect the same as any other major asset. Non-recourse factoring provides that protection and more. In addition to credit protection you also receive guidance from professional credit underwriters letting you know which customers you should be concerned about.
2. Recourse Factoring
In a recourse factoring arrangement, a company sells its invoices/accounts receivable with the promise that the company will buy back any uncollected invoices. The factor does not take the risk of any uncollected invoices regardless of the reason.
Common factoring questions
What happens in the event a customer defaults?
It depends on the type of factoring agreement a business has in place. If it’s a recourse agreement, the business is responsible for buying back invoices that aren’t paid by your customers after a pre-determined period of time—60/90/120 days. However, if a business has a non-recourse agreement, the factor assumes the risk of non-payment by your customers, for certain reasons.
What is the process for receiving credit protection?
Prior to selling and invoicing a customer, the business should submit customer information to the factor. The factor will then determine the credit worthiness of the customer and approve a specific credit limit. In the event that the customer is not approved, the business can choose to sell to them at their own risk. The factor will then decide if they want to advance capital against the unapproved customer invoice.
What if I want to sell to someone who isn’t credit approved?
You can sell to any business you would like. In a non-recourse factoring arrangement, the factor will provide guidance as to who is credit worthy. If you choose to sell to an unapproved account it is often recommended that you receive payment up front instead of issuing payment terms.
The key advantage of factoring
With several reasons why factoring is a valuable financial tool for businesses, the key advantage is that factoring provides a fast boost to your cash flow. Providing cash in as little as 24 hours, it’s a great option for businesses looking to solve short-term cash flow problems while accelerating business growth.
At STAR Funding, we specialize in trade finance—including Purchase Order Funding, AR Factoring and Letters of Credit. Helping manufacturers, importers/exporters and similar businesses achieve a higher level of success with our business friendly loans, we help growing businesses grow faster with a variety of trade finance options.
Contact us today to learn more about factoring.