If your business is facing a cash crunch and you’re looking for financing options that will allow you to keep your operations up and running or tide you over until your customers pay their outstanding invoices, you may have considered accounts receivable financing, sometimes also known as factoring. There are different types of factoring plans available, but one of the most important distinctions you should know about before you sign an agreement is the difference between recourse and non-recourse factoring. Depending on which option you choose, you could be legally responsible for different financial matters. Take a look at the three key differences to be aware of.
1. Full Recourse Means Non-Payment Liability
If you sign a full recourse factoring agreement, you’ll legally be on the hook for the invoice amounts if your customers fail to pay. This is often the case regardless of their reason for non-payment, so whether they have quality disputes or just aren’t able to come up with the funds to pay, you’ll still need to repay the advanced amount.
2. Non-Recourse Gives You Some Financial Protection
In contrast, non-recourse factoring differs in that unpaid invoices won’t have to be paid back to the factor if the customer was insolvent during the time of your contract. While some non-recourse agreements protect you from having to repay the amount in any case of customer non-payment, others have more specific requirements. Be sure to read the fine print before signing.
3. Consider Your Customers’ Creditworthiness
The decision of which type of accounts receivable financing is right for you can depend on a few factors. For instance, non-recourse factoring provides you some legal protection but may come with additional fees. When making your decision, consider your customers’ creditworthiness and their likelihood of paying their invoices. This can give you a better idea of whether paying non-recourse fees is worth the extra protection, or whether you feel safe with a recourse option, knowing that your customers will likely make their payments.
When you’re a small business owner and your invoice amounts haven’t shown up in your bank account yet, accounts receivable financing could be the perfect way to pay your employees, restock inventory, cover regular expenses, and even work on expansion until the invoices are paid. Before you sign a factoring agreement, though, check the details and understand whether the offer is full recourse or non-recourse. When you understand the differences, you can feel confident about choosing the right option for your business.