Types of Invoice Factoring
Did you know that you have options if you decide to factor your outstanding invoices? Many people are surprised to learn that there are two different types of factoring, and that one option may work better for your business than the other.
The fundamental benefit of factoring is that it is a fast and efficient method of financing that significantly improves cash flow. The different types of factoring to consider are recourse factoring and non-recourse factoring and each has different benefits depending upon the needs of your company.
Outstanding invoices are sold to the factor for cash minus any transaction fees. Your company agrees to buy back any invoices that are paid late or that remain uncollected. This form of factoring means that you are prepared to take back some of the risk of the transaction, and can therefore guarantee lower factoring fees.
The basic agreement is the same. However your company would not agree to buy back any uncollected invoices. Any losses are absorbed by the factor and you do not have to worry about bad debt. In this scenario, the factoring fees would be higher, but there is no risk involved.
So what should you bear in mind when deciding which path to take? Consider asking yourself the following questions:
- Do my customers generally pay their invoices in a timely manner?
- How long can I wait if my customers pay late?
- How large are my invoices?
- How much bad debt am I prepared to absorb?
The answers to these simple questions should give you a clear indication of the program that is best for your business.