What is the difference between recourse and non-recourse factoring?
The first question you are most likely asking is ‘what is factoring’? Put simply, factoring allows you to improve your business cash flow by accessing a percentage of the value of your unpaid sales invoices in the form of a cash advance. The invoices themselves act as security. That is, no real estate security is required. This allows your business to get paid quickly. There are two main types of factoring – recourse and non-recourse.
With recourse factoring your company is accountable for and must repay any invoices that the factoring company is unable to collect payment on. This is unlikely to occur if your company factors invoices with customers who have a good credit track record and payment history. Another benefit of your business having credit-worthy customers is that you will pay lower fees for the factoring service and may be able to earn larger cash flow advances which helps your business grow.
Non-recourse is the opposite of recourse factoring as the factoring company inherits most of the risk of non-payment from your customers. Sounds too good to be true? Well, you are not protected from all risk dependent on the specific terms associated with the non-recourse factoring agreement. Of course, to name one term, the extra risk would come with higher fees to your business for the non-recourse factoring facility.
A reputable factoring company will discuss your options with you so that you understand the terms involved. This discussion should also involve probable ways forward if in the event your customers cannot pay their invoices. For example, withholding a portion of future cash advances, or deducting from your reserve account until the invoices due have been recovered. As with everything in life, it is always good to be well informed of the risks involved, but overall, it is the goal of a reputable factoring company to see that your business succeeds. There are many benefits to factoring your invoices, in particular, increasing cash flow so that you can have a dependable source of money for rent and wages, as well as, investing in business growth.
Nova Cash Flow Finance offers a reliable recourse factoring facility and are committed to the growth of small and mid-sized businesses. If you have questions reach out to us for an obligation-free chat.