Invoice factoring is a type of alternative financing that can help businesses obtain the funding they need. There are two main categories of invoice factoring, recourse and non-recourse. Let’s look at the similarities and differences between these types of funding.
What Is Invoice Factoring?
Invoice factoring is a type of financing used by businesses that issue invoices to their business customers and have to wait 30 – 90 days to be paid. This includes business-to-business (B2B) services in many industries, such as transportation, manufacturing, staffing, energy, construction, and many other business services. With invoice factoring, you sell your unpaid invoices to a third-party factoring company. The factoring company pays you once they verify the invoice, providing you with cash flow to run your business. Then the factoring company collects on those invoices directly from your customer.
How Can Small Businesses Benefit From Factoring?
If your business sends out invoices, you are probably accustomed to waiting 30 or more days for customers to pay. This can make your cash flow challenging. When you factor invoices, you can get paid sooner and improve your cash flow. The following are some of the top reasons so many small businesses use invoice factoring.
- Make payroll more easily
- Pay business expenses on time
- Invest in additional inventory
- Expand your business by hiring more staff or opening more locations
Related: Cash Flow Basics: What To Look For and How To Improve It
Factoring vs Other Types of Business Financing
Many businesses find that invoice factoring is a good alternative to traditional financing options such as bank loans. It’s easier to qualify for factoring since factoring companies most often rely on your customers’ credit history rather than yours. When you factor invoices, it’s not a loan so you aren’t taking on any debt or affecting your credit score. Fees are deducted from the payments you get, so you don’t have to worry about acquiring more debt.
What Is Recourse Factoring?
Now we’ll look at the differences between recourse vs non-recourse factoring. With recourse factoring, a business is responsible for buying back any unpaid invoices. In other words, if you factor an invoice and your customer doesn’t pays the factoring company, generally within 90 days, you must buy back the invoice. Here are the main pros and cons of recourse factoring.
Pros of Recourse Factoring
- This type of factoring will often have the lowest fees.
- It’s easiest to qualify for recourse factoring.
- The factoring company still performs credit checks on your customers to help lower the risk of defaults.
Cons of Recourse Factoring
- Higher risk with no bad debt protection If you have a client that doesn’t pay their invoice, you can suffer a setback by having to cover the cost.
- The factoring company is less motivated to use their own resources to collect on an invoice.
- The factor performs less rigorous credit checks on your clients than with non-recourse factoring.
What Is Non-Recourse Factoring?
Non-recourse factoring is a type of factoring where the factoring company assumes the risk of non-payment by clients. With this type of factoring, you minimize the risk as you are not liable if the client doesn’t pay due to credit reasons. Here are the pros and cons of non recourse factoring.
Pros of Non-Recourse Factoring
- Boosts cash flow for your business
- You don’t have to handle collections
- You have a high level of protection as the factoring company assumes the credit risk
Cons of Non-Recourse Factoring
- Not as easy to qualify for as recourse factoring
- Cost is generally higher
- Credit lines may be lower as the risk for the factor is higher
For reference, Riviera Finance is a non-recourse factoring company with more than 50 years of experience helping businesses like yours.
What Type of Factoring Is Best?
There are many types of business financing and the same solution isn’t right for everyone. As we’ve seen, there are pros and cons to both recourse and non-recourse factoring. Here are some criteria to consider if you are wondering which is best for you.
What is your risk tolerance? This is a matter of financial security. Recourse factoring requires you to take on greater risk if clients don’t pay their invoices.
Can you afford bad debt? If your customer ran into financial issues and didn’t pay you, could your business survive? If the answer is ‘no’, non-recourse is a must for you.
How financially secure are your customers? If your customers have a solid history of paying their invoices, you may feel more confident taking on a higher risk with recourse factoring.
Choosing the right type of financing is a serious decision. If you are considering invoice factoring, you should talk to a factoring company and find out what type of arrangement is best suited for your business. Whether you use recourse or non-recourse factoring, it’s important to be fully aware of the terms, fees, and any obligations you are taking on.
How Riviera Finance Can Help
Regardless of what kind of factoring you apply for, it’s important to partner with a financial company you can trust. Riviera Finance is a non-recourse factoring company with more than 55 years of experience helping businesses in many industries get the funding they need. Benefits of working with Riviera Finance include:
- Get cash when you need it. We provide the fastest cash turnaround in the industry.
- Highest payouts in the industry.
- Simple application process.
- Convenience with access to your account 24/7.
To learn more about how invoice factoring can help you, fill out a form online for a free consultation with Riviera Finance today.
