Many small business owners already know that accounts receivables financing is a great way to free up working capital. When a business owner decides it is time to start factoring there accounts receivables, they have to make a choice between recourse factoring and non recourse factoring. The difference between the two is pretty easy to understand, but deciding which is better for your company can get a little complicated. In this article I will give a detailed description of both and some tips to help you pick the one thats right for your business.
NON RECOURSE FACTORING
Think of it as selling your invoices at a discount to the factoring company. This is when you the business owner turns over all legal responsibilities of the invoice to the factor. Leaving the factoring company with the risk of never being able to collect from the customer. You do not have to repay the advance or try to collect payment from the over due customer. Non recourse factoring is more expensive because of the higher risk and usually requires you to pay interest for a set period of time. This helps the factoring company recoup some of there lose if they are unable to collect the debt.
RECOURSE FACTORING
This is the opposite of Non recourse factoring. You can think of it as a loan until the customer pays the debt. The factoring company will try to collect until the due date of your advance. If they are unsuccessful, it will be your responsibly to collect from the customer and repay the advance to the factoring company. There are less requirements and fees associated with recourse factoring because of the lower risk.
TIPS TO HELP YOU DECIDE
If you have been working with a customer for a long period and are confident they will pay, it is in your favor to use recourse factoring. On the other hand, if you and the customer have a new partnership then you may want to use non recourse factoring or give it some time to gauge there ability to pay. You should also consider bundling your invoices to save on fees.
While receivables financing is a great tool, you will have much to consider if you ever need to use it. Make sure it is your last option because you will still lose a portion of your profit for the quick cash advance.