When you own a business, making sure you have a steady flow of cash will keep it operating day-in and day-out. Since every business will come with a wide variety of different expenses, bills, and employees on the payroll, you need to have peace of mind knowing that your customers will pay their invoices on time.
For those that seem to never receive invoices on time, you’re likely tired of the uncertainty that arises when you’re left wondering whether or not you’ll be paid for the work you’ve done. After all, you didn’t accept the job to do it for free!
Businesses finding themselves in this conundrum often have turned to factoring companies to help keep their business afloat. A factoring company becomes the middleman between you and all your unpaid invoices. Since most companies will have a growing stack of these in their office, you’d be surprised at just how much business you’ve been missing out on.
Factoring companies will typically offer two different factoring agreements — recourse factoring and non-recourse factoring. The one your factoring company has you sign will determine what happens when a customer doesn’t pay the invoice after you’ve handed it off to the factor.
What Is Recourse Factoring?
Recourse factoring is the type of agreement you will see most often with these kinds of companies. This agreement will require you to buy back any invoices the factoring company can’t get paid for you. While this will put you right back to square one if the factor can’t get it paid, they will often work with you on repaying them.
The reason most factoring companies will prefer recourse factoring is the credit risk will remain with the company invoicing the customer. The factor won’t be putting themselves at risk because one of two things will happen:
- They will get the invoice paid and make a small commission on the invoice.
- The invoice won’t get paid and they will eventually receive their advance back.
This is normally going to be the way to go for anyone looking at easy solutions to their most common accounts receivable issues.
What Is Non-Recourse Factoring?
With non-recourse factoring, things work a little differently because the factor will assume responsibility for most invoices that aren’t paid by the customer. In these agreements, the company will receive an advance, whether the invoice is paid or not.
This helps businesses receive their invoices in a timely manner without having to worry about the invoices that never see a payment. Since all those losses are absorbed by the factor, your business will go unscathed.
Still, there are several exceptions at play here. For example, the company will be responsible for repaying the advance from the factor if the unpaid invoice is a result of the customer filing for bankruptcy. In this case, the company will have to re-absorb the invoice and hope for the best.
If you’re looking for the best factoring companies around, we’ve had several of our people go “undercover” to get the inside scoop on some of the most well-known factors. Don’t hire a company without reading our reviews first!