If your business is looking for ways to boost cash flow stability and improve the overall financial health, recourse factoring has probably come across your radar. Different from non-recourse, recourse factoring provides quick payments but also puts you at risk, if the client fails to pay the factoring company. But is it too risky or is it actually worth taking the opportunity? Let’s see how this form of factoring works, so you can decide for yourselves!
How recourse factoring works in normal circumstances
In normal conditions, you were to send an invoice to your factoring company which is legally labelled as selling. The factoring company buys your invoice for 80-90% of its total value (average rate is 85%) and pays you immediately. The client is now obliged to pay the factoring company and not the service provider (you).
If everything goes according to plan, you receive money the same day or very soon after sending the invoice. Using factoring software within the company is a great way to manage factoring-related operations. There are dedicated recourse factoring applications which streamline every process that could be debtor finance-related. It’s possible to automate client invoicing, manage agreements, financial transactions, contracts and track data in real time. That’s a great tool for finance companies and companies which are involved with a lot of factoring agreements. Soft4Factoring seems to be one of the best-rated and most trusted tools in this category, that is available today!
What happens if there are issues and disputes?
If there are issues and disputes, the company which uses the factoring service is at risk. Why? Because recourse factoring makes it an obligation to cover the losses, sustained by the factoring company, if the client fails to pay, whereas non-recourse factoring does not make such an obligation.
Payment disputes could arise due to disputes, intentional or unintentional delays, bankruptcy of the client or if the client encounters some sort of financial trouble. In case of disputes, the factoring company does not have a lot to offer and the problem is handled by the client and seller directly. Depending on the outcome, the solving of the dispute could be escalated to court or resolved through compromise.
Slow and delayed payments are usually handled according to the contract. Most factoring companies allow up to 90 days for the client to pay them in full until they ask the client to take over. Remember that the factoring company cannot take up any loss, which means that you might also need to encourage your clients to pay on time. When it comes to client going bankrupt, the contract will dictate whether you need to cover that loss or not.
Should you use this service?
Recourse factoring is a great way to strengthen your company from a financial standpoint. By improving cash flow, you can dedicate funds to R&D or purchase necessary inventory to outcompete your competitors. However, don’t forget that recourse factoring does have its risks. You should be aware of them and remember that the factoring company cannot sustain any losses.