As a small business owner, you know that sources of funding can be very limited. This is why many small businesses are turning to invoice factoring as a more viable option for business financing. Whether it is to fuel an expansion, buy new equipment, raise immediate working capital or ease cash flow problems, invoice factoring often becomes the most logical and immediate solution.
However, many businesses that hire invoice factoring companies soon realize that not all invoice factoring agreements are created equal. There are actually two methods of invoice factoring: recourse and non-recourse. Understanding the important distinctions between the two methods will help you select the right financing terms when factoring invoices and accounts receivable.
Recourse Invoice Factoring
When an invoice factoring company advances funds to a business client on their accounts receivable, they expect to receive payment from the client’s customer or account debtor. A recourse factoring agreement means that if your customer neglects to pay the invoice, then you are liable to the invoice factoring company for the balance.
Since the invoice factoring company does not assume the credit risk with recourse factoring, it is often less expensive. For the same reason these arrangements are often easier to find. An invoice factoring company may also demand less control and have fewer requirements pertaining to systems and customers.
A possible disadvantage of recourse invoice factoring is that your company is ultimately in danger of a loss from bad debt. If your customer does not pay the invoice, you must repay the advance along with any fees to the invoice factoring company. An invoice factoring company will generally charge back any delinquent invoices to you after 90 days, depending on the terms of the agreement.
Non-Recourse Invoice Factoring
In a non-recourse arrangement the invoice factoring company has no recourse against your company and cannot force you to make payments if your customers does not. One major advantage of a non-recourse agreement is that once you have sold the accounts receivable, it is no longer your responsibility. It is then the invoice factoring company’s responsibility to collect from your customers. If your customer does not pay the invoice, it should have no impact on your business.
The invoice factoring company will generally check credit on account debtors and handle the collection and bookkeeping functions. They tend to underwrite the creditworthiness of the client’s customers more than the client itself.
However, although you may not have to refund the advance to the invoice factoring company, if your customer does not pay for credit reasons, you may still be liable for any payment disputes involving the product or service itself.
In the current economic climate where loans for small businesses are difficult to obtain, invoice factoring has proven to be the best way to increase cash flow. The primary difference between recourse factoring and non-recourse factoring is the party who is at risk if your customer does not pay the invoice. A professional invoice factoring company will be able to advise you as to which method makes the most sense for your company’s business needs.
If you need a committed invoice factoring company, Bay View Funding is your solution. Bay View Funding specializes in invoice factoring, helping manufacturing, distribution and service companies, including freight transporters, to grow and prosper. Bay View Funding is strongly committed to providing businesses with convenient invoice factoring to solve their cash flow challenges. Visit Bay View Funding at www.bayviewfunding.com to increase your cash flow today.
Heather Preston invoice factoring
- Bay View Funding has provided businesses with invoice factoring to solve their cash flow needs since 1985.