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Factoring Explained

Factoring is the process of selling credit worthy accounts receivable for immediate cash. This cash flow tool has been around for over 100 years and has recently become a powerful way for small business to prosper and compete with big business. As a small business grows they are often forced to offer flexible selling terms to their customers. This puts a strain on cash flow and creates the need for factoring. By factoring invoices a business can offer flexible terms with the confidence they will have cash for the sale within one day.

Could your business benefit from by having immediate cash for invoiced sales?

RECOURSE FACTORING

Recourse factoring is now the most common type of factoring transaction in the United States. This factoring transaction allows the factor to go back to the seller if payment is not received (normally after a 90 day period). The credit risk does not transfer to the Factor during the recourse factoring process. Normally, in the event of non-payment by the customer, the seller must buy back the invoice with another invoice (credit worthy).


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Recourse factoring is typically the lowest cost for the seller because the risk for the factor on the funding transaction is lower.

NON RECOURSE FACTORING

Non recourse factoring puts the risk of non-payment fully on the factor. If the customer does not pay the invoice, it’s the factors problem to deal with and they cannot seek payment from the seller. This often seems like a great way to go, but the factor will only purchase solid credit worthy invoices and often turns away average credit quality customers. The cost is typically higher with this factoring process as the factor assumes greater risk.

WHAT'S THE BEST FACTORING SOLUTION?

This will depend on how you feel about your customers. If your customers are able to pay the invoices on a regular basis then recourse factoring will provide the lower factoring expense. Non recourse factoring may be better if the elimination of all risk is important to you then the higher factoring fee structure. Some business owners prefer the piece of mind it brings and are willing to accept a higher factoring expense.

Learn about the cost of factoring.

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