What's the Difference Between Recourse and Non-Recourse Factoring?
Updated: 6 days ago
Before making any decisions, considering all the potential long and short-term impacts on your business is essential. It is important to not only survive in the market but also grow, generate competition, and succeed. Whether your business is small or large, seeking funding solutions is important to smoothly run the operations, maintain cash flow, gain shares in the market, and fulfill orders. Many entrepreneurs turn to traditional funding solutions such as bank loan to get working capital for their business. However, not all companies are eligible for traditional bank loans, especially if they are startups or have not been in the business market for a long time. Thanks to some new and innovative funding alternatives that are not only less traditional but also quicker as compared to bank loans.
These alternative solutions help startups and businesses get additional working capital and stabilize cash flow. Invoice factoring, in this regard, is one of the common and easy funding solutions for businesses that are unable to qualify for a bank loan and seeking immediate funds. The option is, without a doubt easy-to-qualify for the immediate financial needs. Reliable factoring companies like Porter Capital have made getting additional working capital extremely easy for the companies. With its flexible funding solutions, it can help you maintain your cash flow and working operations by providing instant funding to fulfill business needs. From providing custom loan solutions to inventory borrowing, Porter Capital helps businesses prevent seasonal fluctuations in your business.
How Does Invoice Factoring Work?
Factoring is also labeled as Invoice Factoring and is one of the sub-branches of Asset-based lending (ABL). Precisely, you can use it for generating a financial transaction by selling the account receivables to a factoring company at a discounted price to receive immediate cash. The best part of using invoice factoring is that it can provide businesses with the same day funding as an upfront payment. The payment depends on the sum of the invoices and the industry a business belongs to.
Meanwhile, the factoring company waits until the customers (liable -to-pay) return the remaining balance. Upon receiving the balance or remaining amount, the factoring company subtracts the procured amount and its service fees. This way, the invoice factoring company supports businesses retaining a continuously steady cash flow. In addition, it enables businesses to make the most of their growth opportunities. Factoring generally comprises two ways: Recourse and Non-Recourse Factoring. It is crucial to distinguish between these ways when choosing a trusted factoring company. There is a great deal of difference in both ways of invoice factoring as they offer benefits in different scenarios. To make the right choice, you must find out what factoring company offers you.
88% of the Asset-lending financial industry relies on Recourse funding, according to the latest survey of the International Factoring Association. Recourse factoring is typically a formal agreement between business and a factoring company. When businesses opt for recourse factoring, the factoring company takes the responsibility of recovering the invoices from costing your liable clients who do not pay.
Simply put, if a customer does not pay the cost of invoices within the deadline, the factoring company has a choice to charge unpaid invoices back to business owners. Businesses can replace unpaid invoices with some other good invoices. In certain cases, the process is similar to taking a line of credits from any bank that offers a borrowing base as one of its loan requirements. If invoices remain unpaid for more than ninety days, the bank will not allow you to borrow money against it. Similarly, the factoring company asks you to replace it with unfunded invoices or advanced funds.
Unlike Recourse factoring in non-recourse factoring, the factoring company accepts all the non-payment credit risks of the customers. This option is suitable for businesses that do not meet the criteria of recourse factoring. However, in this option, businesses get the credit guarantee from the factoring company for collecting your invoices. The credit guarantee can be for all invoices or certain clients only.
Typically, this credit guarantee is valid for the clients charged for bankruptcy. Understanding this point is critically important, as this does not guarantee that your business has coverage for the services and goods your clients’ dispute for not fulfilling the specifications. However, it works like an “insurance policy” that protects you from bankruptcy to help your business survive in the market. If you do not take the client’s reliability into account, you may face problems if he/she fails to pay for any reason.
Choosing between Recourse and Non-Recourse Factoring
When it comes to comparing the factoring types, it is vital to identify the party, which is at greater risk for debts. Once you figure out this difference, making the right choice becomes easy.
Recourse Factoring Benefits: Although Recourse factoring is not as risk-free as non-recourse factoring, it is less costly. When clients have delinquent invoices for more than two months, the business has to repurchase the invoices from the facto to recover the cost. Precisely, recourse factoring offers the following benefits:
Fast working capital for business needs
No loans or debts for your balance sheet
Steady cash flow for the business
No stress of handling invoice collection
Non-Recourse Factoring Benefits: Non-recourse factoring is relatively less risky as it enables a factoring company to take full responsibility for unpaid invoices or bankrupt clients. Factors take actions against the clients who default or do not pay in specific times. The option is beneficial if a business lacks money, resources, and money when it is about taking responsibility for invoice collection. The benefits offered by non-recourse factoring include:
Same day cash funding
No risk of credit
No additional debts
Immediate working capital
Overall, invoice factoring is a great funding alternative for businesses to prevent unstable cash flow. However, to reap the benefits of factoring, you need to have sufficient knowledge about the differences between recourse and non-recourse factoring, which can help businesses make informed decisions when choosing a factoring company - if your business needs either recourse or non-recourse factoring head over to our APPLY PAGE and one of our representatives will be in touch as soon as possible or call us at 1-800-737-7344.