When small businesses need to secure funds quickly, there aren’t that many options.Time-strapped directors can apply for a traditional business loan or request an extension to their line of credit, but it will take time to review their creditworthiness, and the process doesn’t always guarantee positive results. So when a business loan isn’t an option, invoice finance (factoring and discounting) may be the right solution for your business.
There are many compelling reasons for directors to give their business a short-term cash flow boost using invoice finance. Firstly, this type of funding is based on the value of the business’ outstanding invoices and not on the strength of the firm’s credit history, which can be useful to smaller businesses struggling with late payment. In addition, it provides quick access to finance, higher funding limits and, importantly, frees up security for other uses. Invoice finance is also a flexible source of working capital as its limits grow in line with business revenues.
Directors considering invoice finance as a source of funding for their day-to-day activities or growth plans should first decide whether factoring, handing over control of the sales ledger to the funder who will collect payment from customers, or discounting, where customers make payments to the business directly rather than the funder and the collection process remains in-house, is more appropriate.
Once directors have decided on the type of facility that’s right for their business, they will then have to consider both recourse and non recourse arrangements.Let’s take a closer look at these two options for a better idea of which is more appropriate for your business.
What is Factoring with Recourse?
A financial product with recourse simply means that the business will remain liable for debts that are not settled by customers. Where the funder is unable to collect payment, the business will be required to refund the cash advance made against that particular invoice. This can be covered as a direct payment or even another invoice of equal financial value. In this scenario, the business will finance unpaid invoices continually, and the debt will be recoverable by the funder from future invoices.
Benefits of Recourse Factoring
One of the benefits of this type of product is that it’s cheaper than non-recourse invoice factoring as the business is taking on all of the risk. Additionally, an arrangement with recourse frequently provides a higher cash advance to the business than a non-recourse agreement as the funder knows that they can legally reclaim the amount if required. In practical terms, directors should only consider factoring with recourse when they are confident that their customers will pay their invoices.
What is Non Recourse Invoice Factoring?
The funder accepts full liability for the customer’s non payment of an invoice with a factoring or discounting arrangement without recourse. This type of facility is the best option if there’s an element of doubt about the customer’s ability to pay either now or sometime in the future.
The additional risk taken on by the funder is reflected in the higher fees and lower advance percentages for invoices. More checks are also carried out on the customer base to offset the risk of fraud. Simply put, the business won’t be able to secure as much cash quickly with a non recourse facility. It’s also worth knowing that if a dispute or query were to arise from one of the invoices, it wouldn’t be covered by the terms of a non recourse agreement.
Need Free Factoring Advice?
If you would like to know more about releasing the value that’s tied up in unpaid customer invoices as well as the details of recourse and non recourse arrangements, please call 08000 746 757 or email [email protected] for free and confidential advice from one of our professional advisers.