One option for generating working capital for a business is invoice factoring. However, business owners should know that factoring involves two types of agreements: recourse and non-recourse. Before agreeing to any contract it is a good idea for the business owners to determine which of the two methods will work best for the business.
In recourse factoring agreements, the business that will receive an advance payment will still be responsible for the payable of the invoices if the debtors can’t afford to pay for it. The invoice factoring company will have recourse or the option to take back the money from the company. This arrangement is easier to obtain because of the lower risk that the factoring company will take. In addition lower risk usually means lower factoring fees.
While with non-recourse factoring, the company that will receive the cash in advance will not be held liable for the payment of invoices in the future. If the debtors cannot pay their unpaid accounts, the factoring company will take all the risks in collecting all the invoices from the debtors. This arrangement is quite hard to obtain because of the high risk handled by the factoring company. In addition, this method is usually accompanied with high fees because the factoring company doesn’t have the right to take back their money from the companies.
Both recourse and non-recourse factoring can be beneficial for the companies. Both usually have no upfront charges and fees and it may be the quickest way to fund a business in need of working capital. Factors have easy credit qualification requirements and most factors offers confidential consulting for the company owners.
Company owners will usually have an option to choose between recourse and non-recourse factoring. These arrangements take a lot of consideration including the capability of the debtors to pay their invoices, capacity of both the company and factoring company to take risks, and the financial standing of the company as well. If the company is confident that their customers will pay them, recourse factoring is the best option while with those that are uncertain and have higher amount of invoices non-recourse factoring may be the most applicable option.
Whatever the company owners choose, factoring services are a great solution for small business owners to generate more funds for operations and expansion.