INTRODUCTION
Debt or invoice factoring is a form of financing that allows you to turn your outstanding invoices into cash by selling them to an invoice factoring company (also known as a factor) at a discount. Invoice factoring has become a wonderful alternative form of financing. The factoring company takes responsibility for cash directly from your customers. If the customers don’t pay, then the invoice factoring with or without recourse comes in. We will discuss in detail the types of invoice factoring. On a simple note, both Recourse Factoring and Non-Recourse Factoring point out the responsible authority which faces the losses if the customers fail in payment.
WHAT IS RECOURSE FACTORING?
Invoice factoring, which includes recourse, means bearing all the risk factors on your own in case of invoice non-payment from customers and selling the invoices to the factoring company. In other words, the factoring company will make efforts to collect the payment; if the effort of collecting payment ends in vain, the factoring company can effectively shift the risk of non-payment to you and demand compensation. Ultimately you, the borrower, have to handle the losses in possible non-payment.
WHAT IS NON-RECOURSE FACTORING?
Non-recourse factoring, which is nothing but the contrast term of resource factoring. In this case, the factoring company is responsible for all efforts made to collect payments from your customer. The factoring company bears the losses if the business’s attempt to collect the payment is unsuccessful.
In some special cases, there might be certain limits in the non-recourse; if so, you may still be responsible for the unpaid debts of customers. For instance, a factoring company will limit the non-recourse to businesses that have closed or went bankrupt. Compared to recourse factoring, invoice factoring, which includes non-recourse, is less common because of the high-risk factors that add an extra burden to the factoring company.
PROS AND CONS OF RECOURSE FACTORING
Pros
Recourse factoring is the more common of the two types; here are the few effective benefits:
- Enhances the cash flow which helps to meet the immediate need of money
- Factor fee is low so that would be an affordable option for small scale business owners
- The time taken for the approval process is too quick
- The client can either pay back or exchange the bounced invoices with others on default
- As it is not considered a loan, it leaves no debt on the customer’s balance sheet.
Cons
Here are some prominent drawbacks of recourse factoring:
- The credit check on customers’ debtors is not much effective in this case, the factoring company enjoys the benefits of recourse factoring since it is highly risky for the clients
- Unpaid invoices offered in exchange costs a bit higher
- Failure to settle the default from clients results in a negative effect on business income and their bank account statements.
PROS AND CONS OF NONRECOURSE FACTORING
Pros
Upside of the non-recourse factoring as follows
- Working capital and flow of cash gets enhanced
- Protect clients from high level debt
- Payment plan can be provided to the client’s debtors
- Deep verification and good credit checks help the clients minimise defaults.
- Compared to other alternatives like business lines of credit (LOC), no-recourse factoring is relatively easy to get funded.
Cons
In non-recourse factoring, the factors are the ones that are responsible for the risks, so they might have certain limits when signing the agreement, as follows:
- Limited approval of customers or invoices to avoid the risk of paying debts
- Charging higher price to balance the unpaid invoices
- Factoring line size is reduced to some extent
CONCLUSION
We can conclude that recourse factoring is typically better for clients who expect low factor fees and who have reliable customers so there might be reduced risk. On the other hand, non-recourse factoring is better for clients who have a high risk of bad debt and less reliable, risky customers.