Star Funding, Inc.

Purchase Order Financing, AR Factoring, Business Loans

Two Types of AR Factoring

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Recourse vs. Nonrecourse Factoring

When a business needs to raise cash quickly, it has a few different options to improve cash flow. One option is to take out a loan from the bank. Another option is to use accounts receivable factoring company. There are two types of AR factoring: recourse and non-recourse account receivable factoring. In this blog post, we will discuss the difference between the two types of AR factoring(factoring with recourse vs without recourse factoring) and explain the benefits of each one.

Recourse AR Factoring

Is when the account receivable factoring company provides the business with a loan based on the value of the receivables. The business then repays the advance, plus interest and fees, by instructing their customer to pay the factor directly. There is no credit insurance when you factor with recourse.
Recourse factoring agreements are also often times more expensive than non-recourse.

What is Non-recourse 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. A non-recourse factoring agreement is certainly a safer option for borrowers.

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. Covered reasons the factoring company pays for the may include inability to pay due to financial hardship, insolvency of the customer, and sometimes slow payment.
  3. 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.
  3. Accounts receivable factoring loans must be repaid in full by the customer or the client. There is no credit protection from the full recourse accounts receivable factoring companies.

Factors to Consider

Factors to consider when choosing recourse AR factoring & non-recourse AR factoring services 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 under the invoice factoring program
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.
  4. Realize benefit when factoring company assumes the credit risk.
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 of the finance factoring types is right for you.
Contact us today to learn more.

Accounts Receivables Factoring FAQ

How does account receivable factoring work?

The process for accounts receivable factoring is pretty basic. After you invoice your customer the factor will purchase that AR at a slight discount and the customer pays the factor directly.

Is accounts receivable financing the same as account receivable factoring?

Yes and no. Factoring is a form of AR financing, but there are other forms as well such as asset based lending. Under an ABL facility a lender may lend against the open invoices but does not necessarily factor them, or purchase them.

How much does accounts receivable factoring cost?

Account receivables factoring should cost somewhere between 1-3% per 30 days depending on the volume of AR you have and the quality of your customers.