Given a scenario where a small business is having a hard time with cash flows, one of their best options is to choose factoring services. This allows the business owners to eliminate their cash flow issues and deal with the other matters of the business that are important. However, before you decide to sell your company’s accounts receivables you’ll want to consider the difference between recourse and non-recourse factoring.
With the recourse factoring method, the factoring company isn’t liable for the bad debts. If ever the customers don’t pay back their debts, the factoring company has the right to get their money back from your company. This is agreed upon by both parties and it is indicated in the factoring agreement the deadline date for the payments. In addition to having to pay for the bad debt your company will still have to pay for the charge fee and interest even if the refund is done in advance. The advantage of recourse factoring is that the interest rate and charges are less expensive when compared to non-recourse factoring. This is because your company takes all the risk when it comes to their bad debtors and slow paying customers.
Non-recourse factoring is the exact opposite of recourse factoring where the factoring company takes and handles the bad debt risks from the invoices that your company has sold them. They take the risk of the debts if the customers won’t be able to pay their debts on time. This process is quite expensive compared to recourse factoring. In other words if your company agrees to a non-recourse agreement then the factor compensates for this by increasing the charges and interest rates. In this process the factoring company takes all the responsibility to collect the credit from the customers including also the legal action to take if ever they won’t pay their debts.
Factoring invoices is getting popular nowadays to gather immediate funds for the business in order to improve its cash flow. However, the company has to choose first between recourse factoring or non-recourse factoring processes and consider which of the two will be most beneficial for the business owners. In recourse factoring all the bad debts risks are the responsibility of your company thus the factor will have the right to get back the money from your business if your customers don’t pay them. This is the opposite of non-recourse factoring. In these situations the factoring company will take all the risk from bad debts and takes full responsibility in collecting the debts from the customers.