Recourse Factoring excludes bad debt protection. and If the customer fails to pay, The risk remains with you and the factor will demand repayment of the amount financed against that outstanding debt.
Non Recourse Factoring includes bad debt protection. Your factor will be responsible if a credit approved customer fails to pay an outstanding invoice, the amount of the debt outstanding will be credited to you by the factor, provided the debt is undisputed.
Recourse factoring
In recourse factoring, the factor does not take the bad debt risk. Recourse factoring allows the Factor to come back to the Seller for payment. The risk of insolvency does not transfer to the Factor when an invoice is purchased. Even if you refund the advance, you will most likely still have to pay fees and interest.
Since Recourse Factoring offers the least risk to the Factor, this factoring agreement offers the lowest fees, because you are taking the bad debt risk.
Non Recourse Factoring
With Non Recourse factoring the risk of bad debt and non-payment is accepted by the factor. If the customer goes bankrupt or refuses to pay the invoice the Factor cannot come back to you for reimbursement of outstanding invoices.
The factor takes the responsibility to approach the customer for payment, and the right to take appropriate legal action. Factoring fees are higher for this method as it is more risky for the factoring company. A factoring company may want to check the credit worthiness of your customers before a factoring package can be agreed.
Modified Recourse Factoring
Most factoring companies will only do Recourse and Non Recourse factoring. Some factors however now offer bespoke agreement called Modified Recourse factoring. When a customer is unable to pay the invoice due to financial difficulties, then a modified recourse factoring package will cover for this by providing account receivables/credit insurance that offers protection to the Seller. If there is any kind of dispute however, the Factor may have to recourse your other receivables.
To manage debt should you use a company for invoice discounting or factoring?
What is debt factoring? - If you have to pay for raw materials or pay for equipment to carry out a service before the customer pays the invoice you could find yourself in a situation called "over-trading". This is when factoring your debts (debt factoring) comes into its own, it allows you to concentrate on doing what you do best RUNNING YOUR BUSINESS.
Approved Debts
Debts which a Factor or Invoice Discounter is willing to finance are called "Approved Debts".
* Non recourse contracts: Approved Debts are within customer’s credit limits.
* Recourse contracts: Approved Debts are applied to Individual customer accounts.
Disputed debts are unapproved, as are debts that are more than 90 days old.
How debt factoring works
Your company raises an invoice, which instructs your customer to pay the factoring company directly. A copy of the invoice is also sent to the factor. The factor pays pre- agreed percentage of the invoice back to your business. The factoring company then on your behalf issues a statement to your customer. The factoring company will handle all credit control procedures.
When an invoice is paid by the customer
* The customer should pay 100 per cent of the invoice directly to the factor.
* The factor pays the balance of the invoice to you. Fees and interest will be deducted from the payment. See the page in this guide on the cost of factoring and invoice discounting.
Debt Factoring Advantages
* Debt factoring helps your business grow without having to worry about the inevitable periods of low sales
* . Debt factoring helps a company speed up its cash flow by eliminating the waiting period for unpaid invoices
Debt Factoring Disadvantages
* Extra link in the chain.
* Costs involved at least 5% OF THE OUTSTANDING INVOICE.
* Factors may want to contact your customers.
* It could become impossible to get out of the factoring chain.
Factoring & Invoice Discounting | Invoice Discounting | Recourse & Non Recourse Factoring | Export Factoring |
