Star Funding, Inc.

Purchase Order Financing, AR Factoring, Business Loans

Two Types of AR Factoring

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When a business needs to raise cash quickly, it has a few different options. One option is to take out a loan from the bank. Another option is to use accounts receivable factoring. There are two types of AR factoring: recourse and non-recourse. In this blog post, we will discuss the difference between the two types of AR factoring and explain the benefits of each one.

Recourse AR Factoring

Is when the factor provides the business with a loan based on the value of the receivables. The business then repays the loan, plus interest and fees, by instructing their customer to pay the factor directly.

Non-recourse AR Factoring

Is when the factor purchases the receivables from the business for a discounted price. The factor guarantees the customer credit, or provides credit insurance. The business does not have to repay the factor if its customers do not pay the invoices due to financial hardship or other covered reasons.

Main Differences

Non-recourse AR Factoring

  1. Doesn’t require the business to repay the factor if the customer does not pay for covered reasons.
  2. Non-recourse factoring can be more expensive than recourse factoring, but it’s less risky for the business.

Recourse AR Factoring

  1. The business is responsible for any unpaid invoices, and the factor can come after them for repayment.
  2. Recourse factoring is a good option for businesses that have strong relationships with their customers and know they will pay their invoices on time.

Factors to Consider

Factors to consider when choosing recourse AR factoring & non-recourse AR factoring include:
  1. The credit quality of your customers
  2. The terms of the factoring agreement
  3. The fees associated with recourse AR factoring vs non-recourse AR factoring
Recourse AR factoring may be a better choice for businesses that:
  1. Have customers with poor credit
  2. Want to save on fees
  3. Are willing to take on the risk of non-payment from their customers
Non-recourse AR factoring is a good choice for businesses that:
  1. Have customers with good credit
  2. Want to avoid the risk of non-payment from their customers
  3. Are willing to pay higher fees for the peace of mind of non-recourse protection.
The main benefit of non-recourse AR factoring is that it is less risky for the business because it does not have to worry about defaulting on its loan if its customers do not pay their invoices. Non-recourse AR factoring is more expensive because of this added value. However, it is a good option for businesses that do not have the collateral to secure a loan from the bank or that have bad credit.
Both have their pros and cons, so it’s important to understand the difference between the two before making a decision. If you’re not sure which type of AR factoring is right for your business, contact a financial advisor to help you weigh the options.
Ultimately, the choice between recourse and non-recourse AR factoring depends on your business’s needs. Consider all of the factors before making a decision. Whichever type of AR factoring you choose, make sure you understand the terms of the agreement and are comfortable with the risks involved.
So which type of AR factoring is best for your business? It depends on your specific situation. Our team of experts can help you determine which type of AR factoring is right for you.
Contact us today to learn more.