Understanding The Various Types of Factoring
There are two basic types of factoring, one being full recourse, and the other being non-recourse factoring. In factoring, the alternative lender would provide an upfront sum of cash in exchange for your company’s invoices, and two payments would then be forthcoming to your company, an advance and a rebate. The advance happens immediately when you surrender the invoices to the factor, and the rebate occurs after your customers have paid those invoices, and the factor would then remit the rebate to you.
Here are the differences between full course factoring and non-recourse factoring.
This is the less common variety of factoring, and it has frequently been misunderstood by both industry personnel and those outside the industry. The big difference in non-recourse factoring is that if any of your company’s customers becomes insolvent while the factor holds an invoice of theirs, you don’t have to pay the invoice amount on behalf of your customer. It’s important to note that insolvency is the only grounds whereby you would not have to pay the factor. If it were just a matter of your customer refusing to pay the invoice, you would be responsible for paying the factor yourself.
Full recourse factoring
In full recourse factoring, your company would assume responsibility for paying any customer invoices which go unpaid, regardless of the reason for that lack of payment. This is a built-in protection for the factoring company, because some invoices can be for very large amounts, and that could completely nullify any profit that the factor might receive by purchasing your invoices.
Which is better?
Generally speaking, alternative lenders will investigate your customers to determine their creditworthiness, so the chances of a customer not paying an invoice are relatively small. Still, you have to make a company decision on whether it’s to your advantage to arrange for non-recourse factoring, if you think it possible that one of your clients may become insolvent in the near future.
Would your business benefit by factoring?
If you can use some upfront cash that doesn’t involve taking out a loan, factoring may be just what you need. Contact us at ASA Capital Funding to discuss how factoring may provide your business with immediate cash through factoring.