Recourse Factoring vs. Non-Recourse Factoring: What’s the Best Option for Your Business?
If you need a large chunk of cash to cover payroll, invest in new equipment, or pay expenses for your business, accounts receivable factoring may be a good option for you. By selling your existing invoices to an Accounts Receivables company, it will give you the bulk value of those invoices right away, minus an agreed upon transaction fee or percentage. The benefits of factoring are expediency and getting the lump sum of money all at once.
But once you’ve chosen to use a business factoring company, you must now decide whether to opt for Non-Recourse Factoring or Recourse Factoring.
Non-Recourse Financing Pros & Cons
With Non-Recourse Financing, once your business sells its invoices to the factoring company, it is considered a done deal. You never have to deal with those invoices again and if they go unpaid or get paid late, the factoring company assumes all risk and responsibility of collecting those invoices or taking the loss on them.
The factoring company is therefore responsible for collection duties freeing you up from having to deal with this time-consuming hassle. Not having to handle bill collection duties is a good reason why many businesses prefer Non-Recourse Financing. This Limited Recourse Financing also allows for a “fix it and forget it” approach because the company no longer has to worry or fret about whether or not the invoices are going to be paid.
According to Global Funding Resource, non-recourse factoring is by far the most popular option over recourse factoring by more than two-thirds of those businesses who choose to use an accounts receivables factoring company.
The potential downside of Non-Recourse Financing, and this varies depending on the industry, the amount of cash involved and the credibility of the companies who owe the invoices, is that it generally costs slightly more because the factoring company is assuming 100% of the risk rather than only half of the risk as they do in with recourse financing.
Recourse Financing Pros & Cons
Recourse Financing’s primary benefit is that it can be less expensive than non-recourse financing because the factoring company is only assuming partial rather than full liability. Because of this, if you have rock-solid clients where there is little or no worry about the invoices being paid, you may opt for Recourse Financing to save some money.
However, should the invoice go unpaid after a mutually agreed upon amount of time, the unpaid invoices go back to you. In this situation, you and your company would be responsible for either taking the appropriate action to collect the debt or write it off as a lost.
Your industry may also influence your choice in non-recourse and recourse financing as well. Some industries more commonly use one type of factoring or another. In the transportation and freight industry for instance, recourse financing is more common.