Considering different invoice factoring options? Even if you decide the process is right for your business, there are details to contemplate. A key consideration: whether you benefit most from recourse or nonrecourse factoring.
Here, we’ll give the information you need to get started on this decision. You’ll learn the difference between recourse and non-recourse factoring and understand the pros and cons that come with each choice.
What Is Factoring?
First, it’s important to understand the basics of invoice factoring itself. This process lets you receive cash for money clients already owe you. You can leverage your outstanding invoices to receive funds immediately.
Here’s how it works:
You make a sale. The terms call for a future payment — maybe 30 or sixty days down the road. Rather than wait for your client to remit the funds, you can receive that cash immediately. Just contact a factoring firm and get the money you need right now.
The factoring company receives a fee for the service. But you’re able to accelerate your collections. Rather than the delay and uncertainty of waiting for your client to pay, you get certainty and immediate infusion of funds.
Types of Factoring
When considering your factoring choices, “risk” becomes the keyword. Who faces a potential loss if your client doesn’t end up paying for the factored invoice?
Of course, you believe every client will pay their invoices eventually. Otherwise, you wouldn’t have provided them your services in advance of payment. However, this isn’t always the case. Sometimes, a particular customer runs into cash troubles and can’t fulfill their obligations.
That’s when the difference between recourse and non-recourse factoring comes into play. The distinction between the two generally revolves around who takes on the risk if a client doesn’t ultimately pay their bill.
Under recourse factoring, you remain on the hook for a default. As a result, the obligation to collect unpaid amounts falls to you.
If you are unable to collect from your customer, you have a financial obligation to the funding company. In effect, you need to repurchase the unpaid invoice — refunding the cash advance you received through the factoring process.
Non-recourse factoring takes the matter completely off your hands. A delinquent customer becomes the responsibility of the funding company. They have taken on the risk of an unpaid invoice, meaning you won’t be responsible to refund the advance should your client default.
However, there is a potential cost involved. In exchange for the lower risk to you, you’ll pay a higher fee for non-recourse factoring. This extra amount compensates the funding company for accepting the danger of default.
Choosing the Best Fit for You
Fundamentally, choosing the right factoring option comes down to a simple equation. You want to balance the potential risk of an unpaid invoice with the cost involved in the factoring process. A lot will depend on your particular mix of clients and on your ability to absorb a negative turn of events.
If you rarely run into a default or won’t experience a major setback if a client doesn’t pay, recourse factoring might work for you. You can absorb the risk, so better to save the added fees.
For non-recourse factoring, think of it like insurance. Yes, you pay more. But you buy peace of mind with the higher fees. If you’re in a position where worrying about a default will cause you to lose sleep, non-recourse factoring might be worth the expense.
Looking for The Right Funding Option for Your Staffing Firm?
Getting the most out of your financing options means having great partners. Frontline Funding can give you the flexibility you need to drive your business forward.
Contact Frontline today for more information.