Understanding Non-Recourse Factoring Services
What is Non-Recourse Factoring?
With a non-recourse factoring company, a business owner sells invoices to a factor without being responsible for customer non-payment. If your customer fails to pay, the factoring company takes the hit. A simple definition of non-recourse factoring is that you’re not liable for invoice repayment if your customers don’t pay.
To get a better understanding of how non-recourse factoring works, first let’s go over the basics of the funding process.
There are two key steps in any invoice factoring process:
1. You (the business owner) sells invoices to the factoring company for an advance.
2. The factoring company collects invoice payment from your customers.
Factoring is a fast and simple method to turn your accounts receivable into cash. When you invoice your customers, you send a copy to the non-recourse factoring company and receive a deposit within 24 hours. Every business is different, so if you’re deciding between recourse and nonrecourse factoring, we recommend speaking with factoring companies that offer both options so you can make the best decision.
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Differences Between Recourse and Non-Recourse Factoring
“What happens if my customer doesn’t pay the invoice?” is a commonly asked question. In a typical factoring relationship, if your customer fails to pay, then the invoice factoring company can come back to you to claim payment (by “charging back” the invoice or withholding your reserve). A non-recourse factoring company assumes the risk of non-payment, so if your client fails to pay or goes out of business, the factor absorbs the loss. No recourse minimizes the risk to your business, but depending on your program, may not eliminate risk entirely. It’s important to ask factoring companies what cases their non-recourse programs cover.
Non-recourse factoring se is a solid option for many business owners since it provides added security in case of non-payment.
- It’s a higher risk to the factoring company, but a lower risk to you
- You’re not responsible for customer non-payment
- Non-recourse factoring rates are usually higher than recourse
- Some factors might be a little stricter with customer approval criteria for non-recourse
If your customers are generally credit-worthy, this is probably the better option since it will cost less. With recourse factoring, if your customers don’t pay the invoice, the factoring company can require you to pay back any money that’s owed for that invoice.
- Higher risk to your business, less risky to the factoring company
- You must buy back the receivables that your customers did not pay
- A more cost-effective option – recourse factoring rates are lower than non-recourse
Is it Easy to be Approved for Non-Recourse Factoring?
Approval for non-recourse factoring is the same as for a standard recourse factoring company: submit an application, copies of your open invoices, and a current customer list to get started. The factor will base their funding decisions on your customers’ payment history and creditworthiness. Then, your factoring program will usually begin within 3-5 business days. Non-recourse factoring is an option for companies operating in a variety of industries.
The process of invoice factoring, in general, is easy –which is why so many businesses use it as a form of funding. Non-recourse factoring is just as simple.
Factor Finders has relationships with non-recourse factoring companies nationwide that can help you with your funding needs today. Don’t let poor cash flow keep you from meeting your business goals. Contact us to begin a nonrecourse invoice factoring program today!
In the transportation industry? Discover our non-recourse freight factoring services.