Factoring receivables is the process of selling credit worthy accounts receivable for immediate cash. This working capital 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 receivables factoring. When factoring invoices a business can offer flexible terms with the confidence they will have cash for the sale within one day in most cases.
Factoring Receivables Which Method Is Best?
Could your business benefit from by factoring receivables?
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 to satisfy the invoice 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).
Recourse factoring of receivables is typically the lowest cost for the seller because the risk for the Factor on the funding transaction is lower. This factoring process does not reduce credit risk, but it does provide additional working capital.
NON RECOURSE FACTORING
Non Recourse factoring of receivables 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 (depending on exactly how the contract reads). 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 RECEIVABLES 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 receivables factoring will provide the lower factoring expense. Non recourse factoring may be better if the elimination of all risk is more important to you then the higher invoice factoring fee structure. Some business owners prefer the piece of mind it brings and are willing to accept a higher factoring expense. With either option the business increases available working capital by factoring receivables. We welcome the opportunity to learn more about your business and help you determine if factoring receivables can provide a solution for your cash flow needs.