Factoring continues to grow in popularity among small business owners. When you would like to utilize this finance option for your own company, you may wonder what kind of factoring arrangement to pursue.
Most factors offer recourse factoring to small business owners who want to receive the most cash possible for their invoices while also avoiding high interest and fees that come with traditional lending. You can decide if recourse factoring is right for you by understanding its advantages and disadvantages.
What Is Recourse Factoring?
Recourse factoring is the most common choice offered by factors. In fact, about 80 percent of factoring companies make this choice available to customers. Simply put, this arrangement gives your factor recourse to demand payment from you if one of your invoice clients fails to pay its invoice.
In most cases, you must pay back the defaulted invoice within 60 to 120 days. Your client may refuse to pay the obligation because of a dispute, declaring bankruptcy, or another circumstance. Regardless, with recourse factoring, you will be expected to pay back the amount of money your factor advanced to you for that particular invoice.
Who Should Use Recourse Factoring?
Unlike non-recourse factoring, which involves a higher risk to the factor and is more expensive for invoice sellers, recourse factoring can be ideal if you:
- Have creditworthy invoice clients
- Want to avoid paying higher fees like those that come with non-recourse factoring
- Want to sell your invoices at the lowest discount
- Want to receive the most cash possible for your invoices
- Can pay back or have other invoices to exchange in case of a default
While non-recourse factoring would protect you from paying back defaulted invoices, it also costs you more, leaving you with less cash for your business. When you want to get the most money out of your invoices, even with the slight risk of one of your client's defaulting, recourse factoring may suit your purposes.
Who Benefits the Most with Recourse Factoring?
Given the fact that you pay smaller factor fees and receive the most money possible for your invoices, it would stand to reason that you would benefit the most with recourse factoring. You get cash quickly to use however you choose for your business and in return pay minimal fees to your factor.
However, your factor also stands to benefit from recourse factoring in that it assumes a minimal risk to its own bottom line. Even if one of your clients defaults on an invoice payment, your factor can instead recoup its money by demanding payment from you. With that, recourse factoring remains popular with both sellers and factors because of the benefits available to both parties.
What Are the Advantages and Disadvantages of Recourse Factoring?
Like any financial transaction, recourse factoring comes with distinct advantages and disadvantages. Its benefits include:
- More affordable costs than non-recourse factoring
- Faster approval process
- More cash back for invoices
- Factor performs credit check and payment history verification of invoice clients to minimize risk of defaults
Despite the advantages, recourse factoring is not without a few notable disadvantages to you as an invoice seller. The downsides include:
- Factor having recourse to demand payment from you in case of defaulting
- Having your business' income and bank accounts garnished if you cannot pay back the default promptly or offer another invoice of equal or greater value in exchange
Less stringent credit check is done on invoice clients than with non-recourse factoring due to the factor taking on less risk and having recourse for payment.
These pros and cons should come to mind when you are deciding whether or not to pursue this type of business financing.
Recourse factoring continues to be one of the most popular factoring choices available to small business owners. You can decide if it is right for you by knowing its advantages and disadvantages.