A Guide to Invoice Factoring for Beginners
When you need financing, invoice factoring is incredibly common. Recourse and non-recourse are the two common forms of financing that you need to consider. There are benefits to both of these options and the one that works for you will depend heavily on your business and your finances. Here is your guide to recourse and non-recourse.
What Is Recourse Invoice Factoring?
Recourse is the legal right to demand compensation. With this form of financing, it means that you are responsible for purchasing the invoice back for any reason that the customer does not pay. Now, a factor may not leave it at that, however. They usually work with you to pay the invoice. For instance, you may be able to replace the unpaid invoice with a good one, pay the reserve or pay in installments.
The main point of this type of financing is to fix any cash flow problems. If you’re having cash flow problems, you need options that aren’t going to break your business if a customer doesn’t pay.
What Is Non-Recourse Invoice Factoring?
With non-recourse, it means that your invoice factor cannot take recourse against you if your customer doesn’t pay. The invoice factor, instead, has to eat the loss. In the past, non-recourse was normal with this type of financing. Normally the invoice factor had to absorb these losses. Nowadays, even under non-recourse, it isn’t black and white.
Nowadays, modified non-recourse is normal. This is non-recourse through credit protection. This means that you do not have to repurchase an invoice if your customer declares bankruptcy. The factor does not cover the lost capital if it’s a disputed invoice. You are responsible if the customer disputes the invoice.
Invoices that are not paid or paid late because of disorganized customers are not covered under this kind of financing. However, a factor will work with you or the customer to try to fix the problem before you are charged. While this offers a lot of different benefits, this is more expensive than recourse. A nonrecourse factor may not purchase invoices for customers who don’t qualify for credit protection.
When it comes to non-recourse versus recourse factoring, there are a lot of benefits to both. While recourse is the most common, non-recourse might offer you more protection. It’s important when you get involved with a factor that you understand the conditions. Non-recourse, after all, can change definitions depending on the factor. It’s important to find a factor that works for you but also communicates what will happen in the event of non-payment.