What Is Recourse Factoring?
Recourse factoring is an effective financial solution for businesses in which the business tends to sell its account receivables to the factoring company, with a guarantee that it would repurchase these invoices in case of non-payment (uncollectible accounts) by the customers. With this, the factor will not have to take the risk of any bad debts. The factoring agreement specifies the number of days you have after the due date of the payment for refunding the advance.
Whether the money gets refunded to the factor or not the business still needs to pay interest (discount charge) and fees.
How does Recourse Factoring Work?
The working of recourse factoring is quite straightforward. In this, a business is entitled with a recourse period, which is usually about 75 to 90 days from the last date of the month when the invoices were raised. From this, if an invoice was raised on 24th November, the last date (30th November), along with 90 days would be 28th February. So, if customers don't pay for their invoice dated 24th November, by 28th February you will have to refund the money to the factoring company.
Since the factor experiences minimal risk, this form of factoring is much cheaper compared to other alternatives available in the market. Apart from this, there are only a few credit restrictions ensuring businesses are able to haul a large pool of customers.
Is Recourse Factoring Best For Your Business?
Considering that you are going to pay a small factor fee and will get the maximum value possible against the invoices, this is ideal for any business that is looking for some quick cash. However, there are certain requirements that have to be met so as to be eligible for the finance.
Hence, recourse factoring is great for the businesses which:
- Want to sell the invoices for obtaining funds
- Have a network of creditworthy clients
- Can either exchange invoices of the same amount or pay back in case of a default
The Pros and Cons of Recourse Factoring
To determine whether your company should pursue recourse factoring or not, you must weigh both the pros and cons that has to offer.
Some of the exceptional benefits that businesses get to enjoy with the use of recourse factoring are:
- Lower Rates: It's because of the nature of this finance, the factor is able to come up with lower rates and provide more funds for supporting the operations of your business. As, at the end of the day if things don't move according to the plan then your company would have to bear the unpaid invoices.
- Stimulates Immediate Cash Flow: When in need of some urgent cash, then this can turn out to be a good solution. Plus, unlike the traditional loan there will be no sort of debt mentioned in the balance sheet.
- Credit Checks: The factor would verify the payment history of clients and perform credit checks in order to reduce the risk of defaults.
Along with the amazing pros, there are certain cons to recourse factoring as well and these are explained below:
- Recourse period: The factor comes with a recourse period after which it can demand the 80% advance paid to you for the invoices. This would be make things difficult if you can't repay them back or lack invoices equal to greater to the value in exchange.
- Loss of Customer Goodwill: The presence of a factor does affect your relationship with the customers to a certain extent. Therefore, if you rely on a factoring company taking good care to restore the customer goodwill is a must.
When placing your best bet with recourse factoring, your selections must be based on the credit problem, recourse and credit event, to understand when exactly this financing can come into play.