If you’ve heard the term “factored with recourse,” but don’t know what it means, you’ve come to the right place. In today’s post, we explain what happens when accounts receivable are factored with recourse and the implications for your business. Keep reading to learn more.
How Does Factoring Work?
Before we delve into recourse factoring, we need to take a look at how factoring works.
Receivables factoring, also known as invoice factoring, is a financial transaction where a business sells its unpaid invoices to a third party (called a factor) in exchange for immediate cash.
The factor pays your business upfront and then collects the invoices from your clients in exchange for a small fee. This way you don’t have to wait up to 90 days to get paid!
What You Need To Know About Recourse Factoring
Recourse factoring is where a business sells its accounts receivable to a factor, but the business owner remains responsible for the unpaid accounts in case the debtor doesn’t make the payment as per the terms outlined in the agreement.
In other words, if you use recourse factoring, the factoring company can demand payment from your business if your clients default on their payments. Therefore, taking up recourse factoring in place of non-recourse factoring can impact your business finances significantly.
What Is Non-Recourse Factoring?
Non-recourse factoring, on the other hand, is where your business factors receivables but without any obligation on your part to repay if your clients fail to pay.
You read that right: With non-recourse factoring, once the factoring company buys the accounts receivable, you are free of any obligation should a nonpayment occur.
When businesses opt for non-recourse factoring, they’re transferring the risk of unpaid invoices to the factoring company, adding a layer of protection against bad debt.
Wrapping It Up
Understanding the difference between recourse and non-recourse factoring is crucial for businesses before they consider selling their accounts receivable.
When factoring accounts receivable with recourse, the business owner remains responsible for any unpaid debts, unlike non-recourse factoring, where the factoring company assumes all the risks.
Business owners need to weigh the pros and cons before opting for either recourse or non-recourse factoring.
ACS Factors: We Turn Your Invoices Into Cash
We are a Factoring company located in Upland, California, with many clients nationwide in the distribution and logistics corridor which includes Ontario, Riverside, Fontana, Jurupa Valley, and Moreno Valley.
Get in touch by email (info@acsfactors.com) telephone (909-946-5599), or through our social media accounts on Facebook, Twitter, and YouTube.
