The Types Of Invoice Factoring
There are a number of different kinds of invoice factoring and each factoring company will have variations of these services within their portfolio.
Recourse Factoring
In a nutshell recourse factoring is where the factor (the company lending you the money) does not take the bad debt liability. It works by the arrangement of a pre-determined period of credit that is provided to your customers by the invoice factoring company. If an invoice has not been settled and when this period expires you have the responsibility to pay back the monies given when the invoice was created as well as the interest and charges for that invoice.
It is then your responsibility to chase the payment for that invoice and take the risk of the bad debt or not being able to recover the money.
The advantages of recourse factoring are that the charges are usually less as the factor is not taking the bad debt risk. It may also be easier to get an invoice factoring facility as there may be less stringent checks and because there a less of a risk the factor is more likely to grant you a facility.
Non-recourse Factoring
Non-recourse factoring is the opposite or recourse factoring. It this case it is the factoring company that takes the responsibility for any bad debt. You will usually never have to pay back the money you have received against an invoice, however you also give up the right to pursue the outstanding amount even in a claims court.
Non-recourse factoring is usually more expensive from an interest and fees point of view to offset the risk that the factor is taking by being liable for the bad debt.
Invoice Discounting
Invoice discounting is usually for larger companies with a substantial financial administration department. Invoice discounting is an anonymous service where your customers do not know that the factoring company exists. The factoring company is really just a money lender with this product as all the issuing, administration and chasing of payment is made by you. You still receive a percentage of the invoice amount quickly on issuing the invoice but bear in mind the factoring company is securing it’s liability against the value of the invoice.
Each invoice factoring company has different requirements and conditions for their invoice discounting products. Some invoice factoring companies will also provide something called Asset Based Lending, where they will lend you amounts secured against things like stock, assets and property.
One good example of asset based lending is a second hand car dealer. They need the finance to purchase the stock of the cars, and in the majority of cases this is provided by an asset finance company. The finance lent is secured against the cars they have bought so this gives a level of protection to the invoice factoring company.
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