Many businesses experience cash flow issues, especially those that offer long payment terms to their customers. One solution to the problem of waiting for delayed payments is factoring. Here is an explanation of the options if you decide to take advantage of this form of funding.
The Basics of Factoring
When you factor your accounts receivables, you deliver your products or perform your services and then send invoices to your clients. A financing company, known as a factor, purchases your unpaid invoices and sends you an advance of up to 80 percent of their value. After the clients have paid in full, you receive the balance of payment minus a factoring fee. There are generally two types of factoring programs: recourse factoring and non-recourse factoring.
Types of Factoring
With full recourse factoring, if a client for any reason does not pay an invoice, your company is liable for the payment. You must reimburse the factor by paying them back the amount of the unpaid accounts receivable or by supplying them with another invoice. In non-recourse factoring, you do not have to pay back the factor if a client defaults, but only under certain conditions. The non-payment has to be because of bankruptcy, closure, or some other insolvency issue, and this insolvency must take place during the time period in which the invoice is due. Otherwise you still have to pay back the factor if your client, for whatever other reason, doesn’t pay.
The Best Choice for Your Company
Whether the more suitable financing option is recourse or non-recourse factoring varies depending upon the situation of the company selling its invoices. Factors carefully research the creditworthiness of your customers before they purchase accounts receivables, so defaults are unlikely, but they do sometimes occur. Non-recourse factoring is more expensive, so it’s up to you as the business owner to determine whether the extra cost is justified for your company.
For more advice on recourse and non-recourse factoring, get in touch with Star Capital USA.