Uneven cash flow is a concern for many medium and small businesses. While long credit terms may be attractive to customers, sometimes waiting for cash from accounts receivable for 30-90 days is not feasible. Expenses like payroll must be paid no matter what. Growing a business is hard when there is no cash to finance it.
Many industries, such as staffing and construction, turn to accounts receivable factoring to improve their business cash flow. With accounts receivable factoring, a factoring company buys the unpaid invoices from the business and advances immediate cash less a small fee. Before a company makes a decision on which factoring company to choose they must research the different types of accounts receivable factoring services available in order to find the best match.
Different Types of Factoring Services
Invoice factoring companies can accommodate business cash flow needs in several ways
Recourse factoring: With recourse factoring, the client assumes all the risk of unpaid debt from their clients. In other words, if their client does not pay the factoring company within the specified amount of time, the business must pay back the invoice amount. It can be risky for businesses with unpredictable clients, but the benefit is lower rates.
Non-recourse factoring: In a non-recourse factoring agreement, the factor is wholly responsible for unpaid invoices in the case of client bankruptcy or insolvency. However, non-recourse factoring does NOT cover situations in which the customer disputes the invoice, either for accuracy or due to an issue with the product or service. To offset the risk, often a factor will charge higher factoring fees and advance rates.
Spot factoring: Spot factoring offers no long-term contract with the factoring company, and instead factoring is done on a case-by-case basis. Non-recourse and recourse factoring require all invoices to go to the factor, but spot factoring enables the company chooses which invoices to factor.
Of these types of factoring services, recourse factoring is a popular solution because it offers lower factoring rates and fees. Recourse factoring gives businesses the most money for their invoices, which means opportunity for growth. Since the factoring company also checks the credit history of the business’s clients before approval, bad debt is unlikely from clients who have a clean past. This mitigates the risk the company takes when they assume the responsibility for all invoices given to the factor. For good clients, lower factoring fees, higher advance rates and many other reasons, recourse factoring is a good way to go for companies wanting the most bang for their invoices’ proverbial buck.