I haven’t seen much being written or talked about on the process of Invoice Factoring lately. I wonder if folks are so absorbed with securing financing that they forget about other avenues to finance their project.
So, let’s see…what is Invoice Factoring? In short it’s a fast, easy and affordable way to turn the Accounts Receivable into cash.
The concept is not hard to understand. For example, Company A delivers goods or services to Company B and invoices Company B for them. The factoring company then advances a percentage of the invoice to Company A (typically 70 – 90%). Company A receives their cash immediately not having to wait 30, 60, or 90 days for Company B to pay. After a due period of time, Company B pays the factoring company the full amount of the invoice. The benefits are clear. Company A got paid immediately, Company B received its goods or services, and the Factoring company made money on the transaction. Once Company B paid in full the invoice to Factor, the difference is sent to Company A but only after Factor’s fees are deducted. In a perfect world that would be the end of things.
In the real world however, there are occasions when Company B does not pay the factoring company in a timely fashion. It is at this point that the concept of recourse and non recourse comes into play.
Factoring with recourse implies clear responsibility of Company A owing the Factoring company full amount of the invoice if Company B does not pay the factor in a timely fashion (usually within 90 days).
Now, don’t assume that factoring without recourse means that if Company B fails to pay the factoring company, then Company A is off the hook! This is not the case. In practice non-recourse factoring means that if, and only if, Company B cannot pay the factor because they are insolvent, then Company A is off the hook. Since an insolvent company is one that cannot pay its debts – basically the company is bankrupt, whether or not they’ve actually filed for bankruptcy – companies that are slow payers are not covered by non recourse language in factoring agreements. Keep in mind, the Factoring company will verify Company B’s strength during their due diligence process. If Company B is weak there’s a high chance the Factoring company won’t proceed.
If you’d like to learn more about Accounts Receivables Factoring check out my special page on AR Factoring.