At Great Funds Factoring, we understand that scaling your business can be overwhelming as you try to balance day-to-day operations with ensuring the viability of your company.
If you’ve been searching for alternative ways to finance your business, you’ve likely come across terms like “recourse factoring” and “non-recourse factoring.” Understanding the risks associated with each one and how they’ll impact your business is key to running a successful enterprise.
Using a factoring service can alleviate some of the stress associated with growing your business, but which option is right for you? Recourse or non-recourse factoring? Let’s dive into the pros and cons.
Understanding Invoice Factoring
Invoice factoring gives you enough of a cash runway to keep your business afloat as you continue to scale up. A factoring company purchases your unpaid client invoices at a discounted rate and gives you the funds upfront. This way, you have the money you’re due more immediately instead of waiting until the payment period ends.
Why Two Types of Invoice Factoring?
Recourse and non-recourse factoring are different agreements between your business and the factoring company. These two options allow businesses to assess the risks of each one to make the best choice for their growth goals.
Weighing Risk With Recourse Factoring
Recourse factoring is a great option when your goal is to jumpstart your cash flow. That said, it does involve some risks. If the invoices aren’t paid, your company is responsible for buying back any invoices that the factoring company couldn’t collect.
What are Hybrid Recourse and Hybrid Non-Recourse Factoring?
Hybrid recourse and non-recourse factoring are alternatives to full recourse or non-recourse factoring agreements in which the factoring company covers a part of the invoice through credit protection. This allows you to work with clients who have varying credit histories.
Advantages and Disadvantages of Recourse Factoring
With recourse factoring, you are responsible for any unpaid invoices when the factoring company cannot collect a payment within a predetermined time. So, if your client has 60 to 90 days to pay and doesn’t deliver, a factoring company will ask you to repurchase the invoice they bought from you.
Advantages of Recourse Factoring
The main advantage of recourse factoring is that it allows you to scale up quickly. If you need cash on hand to meet expenses, pay employees, and continue to generate revenue, recourse factoring is a viable solution.
Additional benefits include:
- Increases cash flow so that your business can continue to grow
- Options for growth are unlimited if you have clients with good credit
- You don’t have to take out a loan or accrue debt to cover costs
- Alleviates stress – no worrying if you’ll make payroll or not
- It allows you to focus on running your business instead of chasing down payments
Disadvantages of Recourse Factoring
Recourse factoring has risks involved. You will have to pay back any unpaid invoices, which can be detrimental if they start to pile up. You should also consider the following regarding recourse factoring:
- Communicating with sensitive clients about invoicing through a third party can be tricky
- You may need to establish a personal guaranty to cover you if issues arise
- It requires continuous organization and attention when submitting invoices
Advantages and Disadvantages of Non-Recourse Factoring
Non-recourse factoring is an arrangement wherein the factoring company agrees to purchase all or part of your client accounts without requiring reimbursement for any unpaid invoices. This can be a useful route when growing your cash flow, but it also comes with pros and cons.
Advantages of Non-Recourse Factoring
Like recourse factoring, non-recourse factoring fosters company growth while reducing stress over whether or not you’ll be able to meet operating costs. Additional advantages of non-recourse factoring include:
- You can rest assured that one way or another, you will get paid
- The factoring company accepts the credit risk of your clients if invoices go unpaid
Disadvantages of Non-Recourse Factoring
Non-recourse factoring is a more expensive option option. Here are other drawbacks of this agreement:
- It’s not as flexible and can have strict limits about which clients you can work with due to the factoring company taking on higher risk
- There will be higher factoring and monthly minimum fees
- You may not be eligible if you or your clients have lower credit scores
Why Choose Recourse Factoring to Finance Your Business?
When you’re ready to kickstart your growth, you want to work with a factoring company you trust who will guide you through the process with ease. A solid factoring company can also help you identify ideal customers. Recourse factoring is easier to be approved for, has less strict credit requirements, and is less expensive than non-recourse factoring.
It’s the ideal choice for B2B businesses that need to improve their cash flow fast.
Great Funds Factoring has nearly 40 years of experience and specializes in short-term cash flow needs. We center the needs of our clients in all aspects of our business, understanding the emotional and financial investment it takes to keep everything running smoothly.
Ready to partner with Great Funds Factoring and improve your cash flow overnight? Start by filling out an online credit application.
