There are two primary types of factoring: recourse and non-recourse. Recourse factoring is the more prevalent option, requiring your company to repurchase any invoices that the factoring company fails to collect payment on. Ultimately, you bear the responsibility for any non-payment.
Non-recourse factoring, on the other hand, shifts a majority of the risk of non-payment onto the factoring company. It is important to note, however, that non-recourse factoring does not completely absolve your company from all risks. There are typically certain conditions and provisions attached to non-recourse factoring, and the circumstances in which your company is not held accountable for customer non-payment are highly specific.
Regardless of your company's choice between recourse or non-recourse factoring, it is crucial to engage in a productive discussion with a reputable factoring company to thoroughly understand their terms. It may prove advantageous to seek out a factor that offers both recourse and non-recourse factoring options. Additionally, partnering with a factoring company that boasts a strong credit team can assist in steering clear of customers with a history of poor payment practices.
Regardless of the type of account, a reputable factoring company will diligently work to collect on your invoices. They will initiate collection calls to the debtor 40 days after the invoice is sent and continue these efforts for several weeks. If the debtor fails to pay after 90 days, the factoring company may return the invoice to you. However, the factoring company should offer solutions to help cover the costs. They may withhold a portion of future cash advances or deduct cash from your reserve account. Resolving an unpaid invoice should not cause financial hardship for your company, as it is not in the best interest of either party.
The most optimal choice for your company is to have customers who possess a strong credit history and a solid track record of timely payments. This will allow you to enjoy the benefits of lower fees for recourse factoring, all while alleviating any concerns regarding potential risks.