Tag Archives: Factoring

What Are The Two Types Of Factoring?

factoring-servicesThe business firms that want to make cash flow fast can use factoring method for their invoices. In the factoring process, the business firms sell their account receivables to factoring companies at discounted price and the factoring company bears the risk of debtors. Since the payment is made by the debtors, the factors get their payments only after the payments for all the outstanding invoices have done. The debtor needs to pay the factoring company anyhow if the whole invoices have been gathered.

Once you have selected a factoring firm, you must request a quote from them. If their price is reasonable, you can proceed with the further process. When selecting factoring option for financing your business, you must understand about two types of factoring-recourse and non-recourse factoring.

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In the recourse type, you need to sell your invoices to a factoring company with the agreement that you will collect all the unpaid invoices after the completion of the recourse period. The factor does not bear any risk of non-payment of the invoices and you are entirely responsible for unpaid accounts. More than 90% of factors prefer recourse type to prevent the potential risk of unpaid invoices.
Recourse type offers more advantages to the lenders since the lender can go after the borrower when the account debtors of the client default. The lenders have only less risk and the applicants have a huge risk of uncollected payments.

Recourse factoring type is a cheap and easily affordable option for you but you need to hold the additional risk of uncollected invoices.

Non-recourse factoring is considered as a secured debt of collateral loan. In non-recourse type, you want to sell your invoices to a factoring company who offer you required cash to cover the invoices and this type of funding is very useful to business firms that require money fast. In non-recourse type, you don’t hold the risk of unpaid invoices. The factoring company bears all the risk. The transaction cost of non-recourse factoring type is expensive since the lender bears the additional risk and if any liability then the lenders needs to pay them. Majority of factoring firms charge demands .5% – 1% more for non-recourse type.

If you do international sales, then you must choose a factoring firm that offers factoring service to international borrowers. The services offer by each factoring firm varies so you must verify the type of services offered by them before the selection process. Non-recourse type is the appealing approach for most borrowers since they don’t have the risk of loss due to unpaid invoices except the collateral they made on loan. Also, non-recourse factoring works as credit insurance for your company but credit insurance is only possible for large size firms.