Considering invoice factoring? Worried about the implications if a customer does not pay? Allow us to help clarify the process.
Firstly, to put your mind at rest before we go into details, an efficient invoice factoring company will thoroughly vet your customers for reliability to reduce the risks associated with non-payment:
- Run a credit check
- Provide accounts receivable reporting and invoice management throughout the factoring process from invoice in to payment out
With these provisions in place, non-payment to your factor by your customer would be unlikely, but let’s still address the outcomes should your customer choose not to pay.
One of the main decisions is to determine the best factoring service for your company. This relates to the contract you sign when you decide to sell your invoices to a factor for fast cash flow.
Recourse factoring - recourse factoring is generally the most cost effective option. If your customer does not pay the invoice after the agreed period, which could be up to 120 days, your factoring company will not be liable for the money. You will have already received the cash advance from your factor, but you will become responsible for the unpaid invoice and will have to buy it back from your factor. This form of factoring offers the least amount of risk to the factor, and is the most popular choice for factoring your accounts receivables to increase your cash flow.
Non-recourse factoring - should you be concerned about the risk of non-payment with any of your customers, you may want to consider non-recourse factoring. If your customer refuses to pay, whatever the reason, your factor cannot come back to you for payment. The risk to the factor is greater, and therefore, the factoring fees are considerably higher, and your factor will be much more selective.
Modified Recourse Factoring - In the case of modified recourse factoring, your factor will carry insurance against non-payment due to bankruptcy or serious financial issues with your customer. Not all non-payment eventualities are covered however, and in instances like damage claims or disputes concerning service you will be required to buy back the invoices after a time period agreed upon by yourselves and the factor. Collection on these disputed invoices will remain your responsibility.
Choosing to recourse or modified recourse factor, means it is likely that a portion of your advanced cash will be held in an escrow account to be used by your factor if payment is delinquent. You may not want your funds tied up in this type of account.
Recourse factoring is generally favored by most invoice factoring companies. Allowing them to provide multiple businesses with the large advances they are looking for at the lowest possible rate. Assuming the credit risk is something you routinely have to do anyway, so it should not really be an issue when you are contemplating factoring your invoices. Remember your factor will be helping manage the risk by vetting your customers prior to agreeing to factor your working capital.
At Bay View Funding Each member of our dedicated team promises to genuinely, and personally provide you with the best factoring solution to meet the unique and specific needs for your company. We are committed to a 100% satisfaction guarantee.