There are many benefits of invoice factoring, such as the ability to increase cash flow and reduce the stress associated with collecting on invoices. However, before you get started, you must realize that there are two distinct types of factoring: recourse and non-recourse.
Recourse factoring is the more flexible of the two — and the one that Revolution Capital offers. With this, you’re required to buy back any invoices that the factoring company is unable to collect payment on. So, there may still be times when you’re stuck with the burden of collecting from clients.
Non-recourse factoring is the opposite of recourse factoring, with the factoring company taking on the risk of non-payment. However, you may not be 100 percent protected against non-payment. The terms and conditions of your agreement will determine what happens if your factoring company is unable to collect.
Pros and Cons of Recourse Factoring
There are many benefits of recourse factoring, all of which lend to its popularity. Here’s what you get when you go down this path:
- Enhanced cash flow: You never again have to wait to receive payment for your invoices.
- Pass off collections: The ability to pass off collections to a factoring company can save your accounting department both time and money.
- Cheaper than non-recourse factoring: With a lower factor fee, you can expect to receive more money than you would with non-recourse factoring.
- Faster to get started: When compared to non-recourse factoring, it’s almost always faster to get started with recourse factoring.
- Options for unpaid invoices: You have the option to pay back unpaid invoices or exchange them with others.
- More flexible credit limits: Since the factoring company takes on less risk, their upfront review of your debtor’s credit limit isn’t nearly as strict.
Some of the potential disadvantages of recourse factoring include:
- Not all invoices get paid: Even if you have great clients with a long history of paying in full and on time, you never know when non-payment could become a factor. This leaves you on the hook - although no more so then if you didn’t factor at all.
You must be familiar with the pros and cons of recourse factoring, as that allows you to see how it could fit into your business operations. In this case, the benefits far outweigh the drawbacks. And for many companies, the disadvantages above never come into play.
Pros and Cons of Non-Recourse Factoring
Here are some of the primary benefits of non-recourse factoring:
- Protect against bad debts: When you pass your debts off to a factoring company, they become their responsibility. This bad debt protection will give you peace of mind.
- Time savings: As you take the debt collection responsibility off your plate — even for difficult to collect invoices — you’ll find that your accounting department has more time for other tasks.
Now, let’s examine the disadvantages associated with non-recourse factoring:
- Bad debt protection isn’t always what it seems: Carefully review the terms and conditions of your non-recourse factoring agreement before signing on the dotted line. You may assume that you have bad debt protection, but there are often loopholes to reduce the risk taken on by the factoring company.
- Detailed verification process: A factoring company doesn’t want to take on invoices that it can’t collect. To offset the risk, they conduct in-depth credit checks and verification of invoices. This reduces their risk of default.
- Higher fees: Since a factoring company takes on more risk with non-recourse factoring, you can expect to pay higher fees. And when you do that, you receive a smaller percentage of the total invoice amount.
There’s no denying the benefits of non-recourse factoring, but when you consider the disadvantages too, you may soon realize it’s not the right choice.
Factoring Frequently Asked Questions (FAQs)
It doesn’t matter if you’re considering recourse or non-recourse factoring, you’re likely to have questions. And you must answer these questions before making a final decision. Doing so gives you a clear mind as you proceed.
- Can you switch between recourse and non-recourse factoring?
- What is hybrid recourse factoring?
- How much does each type of factoring cost?
- Are you okay with immediately receiving less money for your invoices, as opposed to the full amount down the road?
- Will factoring save your accounting department time and/or money?
While these are among the most common factoring-related frequently asked questions, others may come to mind as you learn more and inch closer to making a final decision.
Along with the questions above — which you can address on your own — there are others that you’ll want to direct to a reputable factoring company. These include but are not limited to:
- Do you offer both recourse and non-recourse factoring?
- Can you provide a breakdown of how your fee is structured?
- How long does it take to get started? What information do you need?
- What sets your company apart from the many others in this niche of the finance world?
- Do you currently or have you previously worked with companies in our industry?
The best factoring companies can answer these questions in an easy-to-understand manner, as well as any others that come to light.
It makes good business sense to compare the finer details of recourse and non-recourse factoring. Doing so allows you to make an informed and confident decision that benefits your company over the long run.
Interested in learning more? Contact our Director of Sales at email@example.com. We provide financing options that work for the individual needs of every business. Let us customize a solution that works for your organization.