Factoring accounts receivable is a common financial practice used by businesses to improve cash flow by selling their outstanding invoices to a factoring company. There are two primary differentiations in factoring—recourse vs. non-recourse factoring and factor accounts receivable vs. whole turnover factoring:
- Recourse vs. Non-Recourse Factoring:
- Recourse Factoring:
– In recourse factoring, the business retains some level of responsibility for the collection of the factored invoices. If the business’s customers fail to pay the invoices, the business must buy back the invoices from the factoring company. The business assumes the credit risk in this arrangement.
- Non-Recourse Factoring:
– Non-recourse factoring is a type of factoring where the factoring company assumes the credit risk for the invoices. If the business’s customers do not pay due to insolvency or other agreed-upon reasons, the business is not required to repurchase the invoices. Non-recourse factoring provides a greater degree of protection against bad debts but is often more expensive than recourse factoring due to the higher level of risk taken on by the factoring company.
- Factor Accounts Receivable vs. Whole Turnover Factoring:
- Factor Accounts Receivable (Selective or Spot Factoring):
– Factor accounts receivable, also known as selective or spot factoring, allows a business to choose specific invoices to factor. This approach provides flexibility as businesses can select individual invoices that require immediate funding while retaining control over the rest of their accounts receivable. It’s a targeted solution for managing cash flow needs on a case-by-case basis.
- Whole Turnover Factoring (Bulk or Full-Service Factoring):
– Whole turnover factoring, also known as bulk or full-service factoring, involves factoring all of a business’s accounts receivable. In this approach, the factoring company purchases all invoices, offering a comprehensive solution for maintaining consistent cash flow. This type of factoring is often more cost-effective when the majority of a business’s invoices need financing and when there is a higher volume of transactions.
In summary, the choice between recourse and non-recourse factoring depends on the level of credit risk the business is willing to assume and the cost associated with the service. Factor accounts receivable offers businesses the flexibility to select specific invoices for factoring, while whole turnover factoring provides a comprehensive solution for consistent cash flow. The choice between these options should align with the business’s financial needs and operational preferences.