A company can only grow and thrive if it has access to its income. Many businesses, however, find themselves waiting for outstanding invoices to be paid by their clients. Until that invoice is paid, the company will have no access to this earned money. Waiting for money can lead to projects being put on the back burner or even the loss of a potential deal. Turning to a firm that offers invoice factoring is one way a company can gain more financial control over its earned income.
Factoring, in simple terms, is the selling of outstanding invoices to a third party firm. These firms purchase invoices for a percentage of the invoice amount. Once an invoice is sold, the firm will be responsible for collecting the owed amount from the client. The company receives a contracted amount of money for each sold invoice, which they can immediately invest into the growth of their business. There is no need to wait for outstanding invoices to be paid.
Recourse or Non-Recourse
In the world of factoring, companies will often have the option between recourse or non-recourse contracts. Understanding the difference between the two is vital for choosing the best one for a specific situation. The majority of factors are based on a recourse model. In this type of agreement, the company is responsible for purchasing back any unpaid, defaulted invoices from the factoring firm. This increases the risk of liability, but recourse factors usually have a higher initial payout.
Non-recourse factors, on the other hand, eliminate the risk of unpaid bills. If a client defaults on their invoice, the factor will handle collections using whatever methods they see fit. The original company will not be responsible for the outstanding invoice. It is important to note, however, that non-recourse factors are paid out on a lower percentage. Many business owners are willing to take this smaller payout because they don’t have to worry about defaulted accounts at all.
Factors are popular with companies that need immediate access to funds from billed clients. When given the choice, many clients will not fully pay their outstanding invoices until the due date. By selling these invoices, a company will be able to invest this income much sooner than waiting for clients to pay.