Invoice factoring is a process where a business sells some of its accounts receivable invoices to a company known as a factor. Upon receipt of the application and invoices, the factor requests a credit check on the customer owing the invoice. For this reason, you should select your best customers whom you know are creditworthy and pay on time.
When the factor approves an advance to your company based on the accounts receivable invoices you submitted, your customer makes payments to the factor directly. You should not expect to receive 100 percent of the invoice value because the company providing the advance has its own fees to cover and will deduct them from your payment.
Before deciding if invoice factoring is the right choice for your business, you should understand the difference between recourse and non-recourse factoring. We explain the highlights of each below.
With this type of invoice factoring, your company retains liability for repayment of the invoice if your customer does not pay. The amount you must repay usually includes the face value of the invoice plus any fees the factor could not collect. While this might sound like a scenario to avoid, keep in mind that you may be able to replace the unpaid accounts receivable invoice with a new one or request that the factor debit your company’s reserves instead.
This option works like recourse invoice factoring except that you do not need to repay the value of the accounts receivable invoices you submitted or the factor’s fees. However, an important exception does exist. You are liable for repayment to the factor if your customer becomes insolvent through business closure or bankruptcy. The insolvency must occur during the initial factoring period, which averages 90 days.
Are You Ready to Explore Invoice Factoring?
Third Bay Capital offers recourse factoring, non-recourse factoring, and several other types of alternative financing for small business owners. We invite you to contact us today to learn more about your options.