If you are like most business owners, you have asked yourself this question,

“My customers are late on their invoice payments, what do I do?”

Your business relies on incoming cash in order to carry out daily tasks. From managing payroll to taking on new clients to updating tools, you can’t accomplish any of these ventures without cash in your pocket. When your customers don’t pay their invoices on time, or at all, it can leave your business in a very sticky situation.

What can you do about it? You can factor your outstanding invoices to a factoring company. They will purchase your invoices to give you up to 96% as a cash advance. They do this in as little as 24 hours. Rather than your clients paying you, they will pay the factoring company, as you have already gotten payment for the invoice. Your business will have access to the cash it deserves faster than ever before.

Factoring is as easy as its sounds, but you must choose which type of factoring is right for your business. What are the types of factoring? Most factoring companies use recourse factoring options, but some use non-recourse. Some offer both! Which is the right for your business? Keep reading to find out!

Recourse Factoring

With recourse factoring, the factoring company will purchase your business’s outstanding invoices, but you will be responsible for missed payments from customers. What this means is that you will still get your 96% cash advance, but if your customer defaults on payments, you will have to buy them back because they still have recourse.

Most factoring companies give you a time frame before buying back or paying off the unpaid invoice. Most factoring companies give your up to 60, 90, or even 120 days for your client to make a payment before they ask you to take over.

In order to help you combat this problem, the factoring company will perform a credit history check on the clients, rather than on your business. This will ensure that they will pay on time and that you will not have to pay back what you rightfully have earned.

Non-recourse Factoring

Non-recourse factoring, as you may have guessed, is the opposite of recourse factoring. With non-recourse factoring agreements, the factoring company will assume all of the risk of non payments from your clients.

With non-recourse factoring, your business is isolated from any negative counts against its credit. If you are thinking this is sounding too good to be true, you are right. Because this puts a lot more risk on the factoring company’s shoulders, the rate will be higher than with recourse factoring.

This should not be enough to allow you to disregard this type of factoring completely. If you are a start up business, or small business looking to grow, this can be a great investment for your company. You can strengthen cash flow, while eliminating the chance of damage to your credit. This will build your business’s credit to a great standing that will allow you to easily qualify for further funding.

Before you dive head first into factoring, we suggest that you consider these two options thoroughly. We hope that this breakdown of recourse and non-recourse factoring will help your business choose the right financing solution.