Factoring is a type of transaction where a business sells their accounts receivable to someone else (a Factor) at a discount. It is often used by businesses with lots of receivables in order to obtain cash quickly and provide the company with the capital that it needs. There are two general types of business accounts receivable factoring, recourse and non-recourse, which work slightly different from each other.
Recourse factoring is an agreement where you and your business are responsible for buying the receivable back from the business accounts receivable factoring company if the amount owed is not paid for by your client after a certain amount of time. The amount of time is pre-determined on the contract, and is usually between sixty and ninety days. It is important to remember that clients may not pay you back for a number of reasons, including bankruptcy or lack of capital, which makes this a riskier transaction for you. This type of factoring is more prevalent and usually less expensive since the company buying the receivable is still sharing the risks associated with the transaction.
Non-recourse factoring is a type of transaction where the party buying the receivables assumes total responsibility for them. This means that the company selling the receivables completely transfers responsibility for them once the transaction is completed. You and your company are no longer responsible for buying the receivable back if it is not paid in time by your debtors. This kind of transaction is less common and understandably more expensive, as the company purchasing the receivable assumes a much greater risk.
When looking for business accounts receivable factoring, it is important to carefully evaluate the advantages and disadvantages of each option. Whether recourse or non-recourse factoring is the best option for your company is ultimately up to you to decide. Be sure to do your research and evaluate what the best option is for you.