When an organization is considering expediting their cash flow through accounts receivable factoring it is important for that organization to understand the value that is provided by choosing to work with a non-recourse factoring company.
Comparing non-recourse factoring to factoring with full recourse shows some of the benefits of choosing a non-recourse factoring company.
Beyond Factoring Fees and Advances – The Benefits of Non-Recourse Factoring
When a business is comparing quotes for factoring services, they are often solely focused on the fee that will be charged or the advance rate they will receive on factored invoices. But fees and advances are just the tip of the iceberg. Astute business owners will also look at the additional benefits provided to them by choosing to work with a non-recourse factoring company in order to reduce – or even eliminate – their financial risk from bad debt.
First, an invoice factoring (a.k.a. receivables factoring) primer. Invoice factoring is a finance tool that can be used by organizations that invoice business customers upon delivery of goods or completion of services.
When an organization (called a “factoring client”) factors an invoice, they sell it to a factoring company, or “Factor”. The Factor that buys the invoice provides the factoring client with an advance on the invoice (we offer fast funding on advances as high as 90 percent of the face value of the invoice) for a small fee (our factoring fees start at 5 percent).
Using invoice factoring, your organization gains immediate access to cash flow that might otherwise be tied up in a customer invoice for weeks – or even months. With improved cash flow, you can take on new business more quickly and ensure that money will be on hand to meet operating expenses.
There are other benefits to factoring invoices as well. Organizations that choose to factor invoices might do so for a variety of reasons; such as:
- speeding up cash flow in order to take on new business more quickly
- maintaining more consistent cash flow in order to meet expenses more easily
- reducing costs (payroll, supplies, mailing, etc.) attributable to receivables activities, including collections costs
- eliminating cash flow challenges caused by slow-paying customers
- extending longer payment terms to customers as a competitive advantage
- or to resolve other common cash flow challenges
Comparing Non-Recourse Factoring to Recourse Factoring
As it pertains to a factoring company, the word “recourse” references the extent to which the factoring company is willing to assume risk of non-payment on factored invoices.
Recourse factoring companies fund advances on invoices with the understanding that the organization will be obligated to buy them back if they go uncollected (for any reason). If an invoice remains unpaid for a certain period of time, the factoring client may be required to buy it back and may also be obligated to compensate the factoring company for administrative and collections costs incurred while trying to collect payment from the organization’s customer. Reduced financial risk for the factoring company sometimes means factoring with recourse offers lower rates, but not always.
Non-recourse factoring companies assume more financial risk from bad debt than those that factor with recourse. When a non-recourse factoring company buys an invoice, the Factor assumes the credit risk. If the factoring client’s customer is unable to pay due to insolvency and other credit-related risks, the non-recourse factor assumes the financial loss.
Organizations that factor invoices with a non-recourse factoring company can reduce, or even eliminate, their financial risk from bad debt, since the non-recourse factor assumes the credit risk. Generally, the only time a factoring client would be required to buy back an invoice from a non-recourse factoring company would be in a case where the invoice itself is in dispute, such as when an order has been returned for some reason.
How the Factoring Process Works with Non-Recourse Factoring Companies
Working with a non-recourse factoring company is important to many of our clients. They use factoring services to free up working capital in order to operate more efficiently and grow more quickly. But they also enjoy the peace of mind of knowing that, once an invoice has been factored, they no longer need to worry about financial risk from bad debt, performing collections activities or even invoicing the customer, depending on their factoring agreement.
Get a Free Quote for Non-Recourse Factoring
We would be happy to answer any questions you might have about invoice factoring with a non-recourse factor or provide you with a no-risk, free, no-obligation quote for non-recourse factoring services so that you can determine whether this type of finance tool would benefit your organization.
Ready to apply? Complete a one-page application online or request more information about non-recourse factoring using the form using the form below.