There are two types of invoice factoring; recourse factoring and non-recourse factoring.
Full Recourse Factoring
In recourse invoice factoring if the customer doesn’t pay their invoice after an agreed amount of time, you will be responsible to buy back your invoice from the factor. However, if you regularly submit invoices for funding, the factor will usually offset the debt against other credit worthy invoices. The benefit of recourse factoring is that the cost is typically lower and more desirable than non-recourse factoring because the factor is not assuming the risk.
In non-recourse factoring, there are two options.
In the first, you have liability related to the factored invoice based on the insolvency of your customer. If your customer doesn’t pay the invoice due to bankruptcy during the agreed amount of time, then you do not have to pay back the advance you received.
In the second option, the factor assumes the entire credit risk. If your customer doesn’t pay their invoice due to any credit reason where they do not file bankruptcy, the factor will assume the entire debt, even if it becomes noncollectable.
Non-recourse invoice factoring is more expensive than recourse invoice factoring because the factoring company is assuming all the risk for unpaid invoices.
Universal Funding only provides full recourse factoring to ensure that we are able to offer the lowest rates possible to our clients. During the application process we take an in-depth look at who is making payments on the invoices, what their payment history looks like, and assess the risk of purchasing the invoices that they will ultimately pay. For riskier transactions, we will take out an A/R insurance policy to protect our customers against unpaid invoices.
Benefits of Non-Recourse Factoring
Non-recourse factoring is another type of invoice factoring where the factoring company assumes the responsibility if the invoice does not get paid. With standard recourse factoring, if a customer does not pay their invoice, it must be paid back or replaced with another invoice. Non-recourse factoring puts all the payment risk with the factor. This has many benefits:
Debt is Assumed by the Factor
After you sell an invoice to a factor and it’s approved, a factor takes on the risk of non-payment. If your customer fails to pay you will not be required to refund the advance back to the factor.
You Can Eliminate Bad Debt
Non-recourse factoring will provide a greater amount of money received at the time of invoicing (also instead of waiting up to 90 days to being paid) and the factor assumes all of the credit risk. Since non-recourse factoring transfers the risk of non-payment to a factor, this means you do not have to worry about being paid. Non-recourse factoring allows you to move on to the next order or project and focus on doing what you do best – provide quality products or services to your customer!
Along with the previously mentioned benefits, non-recourse factoring can reduce or eliminate the stress that comes from collecting from customers and running a business. You will have the peace of mind that whatever happens, your business will still be in good financial health.
How Non-Recourse Factoring is Different
There are 3 main ways non-recourse factoring is different from the standard full-recourse factoring. 1) You will most likely have to factor all of your invoices, 2) no personal guarantee is required for the contract, and 3) factoring fees are higher for this type of financing.
How Invoice Factoring Works
Invoice factoring is a financial transaction involving three parties: the one who sells the receivable (the business owed the financial asset), the debtor (the customer of the seller), and the factor. The factor is the third party who buys the invoice or financial asset from the seller at a discount. The seller benefits because they get their invoice paid early, while the factor benefits by profiting from the discounted invoice.
The sale of the invoices essentially transfers their ownership to the factor, and all rights associated with it. This means that the factor obtains the right to receive payments made by the debtor and they must sometimes bear the loss if the debtor defaults on the invoice (in non-recourse factoring). In recourse factoring, the factor has the right to take action against the seller if the debtor hasn’t paid their invoice in a specified amount of time. In the event of non-payment by the customer, the seller must buy back the invoice with another credit worthy invoice.
Usually the debtor is notified when this financial transaction has taken place; but it can occur without the debtor’s notification.
Why Invoice Factoring?
Many businesses cash flow varies. It might be large in one period while lacking in another. Because of this, businesses find it necessary to both maintain cash on hand and to use such methods as invoice factoring to enable them to cover their short term cash needs in times of lacking finances.
Depending on the business’s cash flow needs, they may need a resource to obtain money. Invoice factoring provides this resource.
How is this Different from a Bank Loan?
In a loan, the bank typically looks at the credit worthiness of the business asking for the loan. In the case of invoice factoring, the factors make funds available based on the credit worthiness of the debtor, the party that owes the invoice balance.
Invoice factoring is a financial transaction involving three parties: the debtor, the seller and the factor. It is essentially a sale of the debtor’s invoice balance owed to the seller, sold to the factor at a discounted price. Both parties benefit. The factor profits on the balance discount while the seller profits by receiving the payment. While this is different from a bank loan, it is a common practice of many large and small businesses and corporations.
Questions about Invoice Factoring?
The decision to factor your invoices could be one that provides many years of growth and profits for your company.
Like any big finance decision, you are likely to have some questions and concerns about the process and its implications, both short and long-term. With invoice factoring, one of those concerns could be what your customers, business associates and/or advisers will think of you factoring your accounts receivable.
First, rest assured that accounts receivable financing is an incredibly common form of business finance used by small, medium and large businesses throughout the world. Even if you are new to the idea, odds are your bigger customers are quite familiar with the process, and even expect it.
Universal Funding has been in the factoring industry for over 15 years, successfully helping thousands of other companies grow and become more profitable. If you have a question, we’ve probably heard it before and can provide a concise answer.
Don’t take it just from us, though. If you have professional, trusted business finance advisers ask them about factoring, too. The good ones will be able to talk you through the many different kinds of factoring and which might be the best fit for your business.
As far as your customers go, the only change they might notice is where they send their payments to you. Your invoicing process doesn’t change and your invoices remain exactly the same save for a change in the remit-to address. You retain complete control over your company, your money, and your customers.
When you’re ready to discuss factoring with some of the best in the business, give us a call and we’ll happily walk you through our process while introducing you to our company and learning about we can help you.
This is Why We’re Here
Sometimes a situation arises that epitomizes the reason Universal Funding exists.
Every employee of this company takes great pride in helping clients grow, solve problems, and make more money. It’s our reason for existence.
Very recently, a business owner came to us with some severe money problems. The problems were not because his business was failing or because he was losing customers, the problems happened because his bank began making unreasonable demands as his business grew.
The business operates in the oil and gas industry and is growing as quickly as it can take on new customers. However, the business owner owed a lot of money to vendors. Over $150,000. In addition, his company burned through over $2,000 in diesel per day and still had to meet a hefty payroll that included a lot of overtime because the company is so busy. Add in other normal costs of doing business, equipment repairs, new equipment needed to finish jobs, etc, and there just wasn’t enough money to go around.
But here’s the real kicker: The bank wanted $72,000, immediately, or it would take back the company’s building, effectively putting it out of business. That makes no sense, because the company still had an outstanding loan for $100,000, which would never have been repaid had the bank taken the building.
For some reason, the bank was about to force a successful entrepreneur out of his growing business because it refused to acknowledge his success and restructure a payment plan based on money he was owed.
Banks can be great to work with, but they can also create severe problems when they refuse to bend on their demands.
Universal Funding saw the potential for this business, and knew it could help out. Through invoice factoring, the business owner got the money he needed to satisfy the bank. Not only that, now he doesn’t worry about how to pay employees or repair equipment and he can sleep at night knowing his suppliers will soon be paid in full.
There are companies in this same position across the country, and Universal Funding is in a position to help out and make sure growing businesses reach their full potential.
It’s what we’re here to do.