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A Guide to Non Recourse Factoring

A Guide to Non Recourse Factoring

Whether you are part of a large business or a small one, it is crucial that your gains outweigh your costs. Unfortunately, in some industries, this can be hard to track when customers make delayed payments for services or goods. If you deliver a service, but the customer doesn’t pay until the following month, then your business report shows a loss of goods in the first month without any payment to cover that loss. For these types of companies, factoring is a great option for bringing in the money faster, and they may wish to consider non recourse factoring.

Factoring simply involves a third party, a factoring company, which takes care of the accounts recievable part of business for a company. The factoring company will pay for the payable invoice (the right to bill the customer) and deal with the payment end, allowing the originating company to collect its money faster, making all the books come out even each month.

The way this usually works is simple. Let’s say, for simplicity’s sake, that the customer owes one hundred dollars, but will not have to pay it until the following month. The factoring company takes over the invoice and pays the originating company seventy-five dollars at the point of taking the invoice. When the customer pays, the factoring company then pays the originating company twenty-two dollars (or so). The factoring company’s fees and payment for their services, then, is covered by the (in this example) three dollars that was retained at the end of the transaction.

The factoring company will collect a small percentage of each transaction as their fees, which is how they gain payment for their services. The originating company receives a majority of their payment up front, and receive the rest later, minus the small fee for the factoring company.

There are two different contract types typical with factoring companies: recourse factoring and non recourse factoring. Both of these deal with the potential instance in which the customer fails to pay the bill. If this happens, then the factoring company is suddenly out the money paid initially for the invoice. In recourse factoring, the originating company then has to pay back the money that was initially paid. In the above example, the originating company has to pay the seventy-five dollars back to the factoring company.

In non recourse factoring, the originating company is not held liable if the customer fails to pay the bill. In this case, the factoring company not only takes the invoice, but also takes on the risk of non-payment. In non recourse factoring, the originating company does not have to pay back the initial payment if the customer does not pay the invoice. All liability and risk are squarely on the shoulders of the factoring company.

Because non recourse factoring carries a higher risk for the factoring company, these transactions tend to come with a higher fee. So all payments that are made will gain less for the originating company because the factoring company retains a higher percentage of each payment. This, however, can be worth it because then the originating company does not have to worry about losing quite as much if a customer fails to pay. Each company will have to consider for itself whether the tradeoffs are worth the risks.

When a company is trying to deal with factoring, they will need to decide before signing the contract whether they wish to deal with recourse factoring or non recourse factoring. If you do not mind higher fees in exchange for lower personal risk, then you might consider non recourse factoring.

Photo courtesy of Philippe Put.

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