Factoring is a form of financing that helps companies with cash flow problems due to slow-paying clients. It allows your business to finance invoices, which improves your company’s working capital that can be used for important expenses.
Non-recourse invoice factoring plans have quickly become very popular with many companies, as it has been “sold” as a total shift of risk if the customer doesn’t pay. This marketing myth can lead to unnecessary costs, misguided expectations, and misunderstandings about the credit-risk relationship.
To ensure that you are setting your business up for success, you need to understand non-recourse factoring and what it covers.
What exactly is non-recourse factoring?
Non-recourse factoring is when a factoring company offers to purchase some, or all, of its clients accounts receivable “without recourse”. This type of factoring is less common than recourse factoring, where your company remains liable if an invoice is not paid by a customer for any reason.
A non-recourse factoring plan actually works the same way as a recourse plan, with the exception that you do not have to pay back the factoring company if an invoice is not paid due to insolvency of the customer during the factoring period. Also, most factoring contracts define the term “insolvency” as a declared bankruptcy. A company could be unable to pay invoices without declaring invoices, so these specific terms are very important to understand.
What will non-recourse factoring not cover?
The factor will not cover the lost capital if the invoice is disputed. If your customer does not think that you fulfilled the order and will not pay, you will be held responsible. Invoices that are unpaid or paid late for customer disorganization or forgetfulness are typically not covered under non-recourse factoring either. However, a good factor should work will you or your customer before charging the invoice back to you.
As you can see, the protection that non-recourse factoring offers is narrow and it is not shifting the risk completely. In addition, many companies develop and offer their own version of non-recourse factoring so it is important to review these contracts with an experienced attorney who can fully explain the terms and there are no misconceptions. You will need to fully evaluate how each factor offers its plans so you can determine which is the best solution for your company.