If you’ve been looking into alternative funding options to conventional bank loans for your small business, you may have considered invoice factoring. This arrangement isn’t technically a loan, since it works with future money that you’ll be receiving from customers soon, but can still get you the cash flow you need quickly. However, before you sign any agreement, you should be aware of a few key differences between recourse and non-recourse agreements, since it makes a difference in what you’ll be liable for should your customers fail to pay. Take a look at these four key facts.
1. Selling Invoices Gives You Immediate Cash Flow
First of all, it’s important to understand that when you work with a factor, you essentially sell them your outstanding invoices in exchange of an advance on the amount. This gives you immediate cash flow to keep your daily operations up and running without having to go to the hassle of applying for a loan. If you have customers who regularly take their time paying invoices, this could be a worthwhile option.
2. Non-Recourse Agreements Provide You Protection
If you sign up for a non-recourse agreement, your factor won’t be able to take recourse should your customer end up not paying their invoice. This means that the factor takes the loss, and you won’t be on the hook for repaying them the outstanding amount. While non-recourse agreements don’t usually cover every scenario of customer non-payment, they do generally provide you some protection in this arena.
3. Recourse Makes You Responsible for Invoice Repurchasing
On the other hand, if your customer doesn’t pay and you signed a recourse agreement, you’ll be liable for repurchasing the invoice. Many times, this is the case regardless of the customer’s reason for non-payment. These arrangements are increasingly common today, so be sure to read the fine print and understand whether the advance you’re getting is recourse or non-recourse.
4. Non-Recourse Isn’t Always Better
While it might seem like non-recourse is always the way to go, this isn’t necessarily the case. In some situations, recourse factoring might actually be more beneficial for you. For instance, if it’s highly unlikely your customer won’t pay, if you’d be able to cover repurchasing costs or if there are up-front non-recourse fees you can’t afford, recourse may be the best option.
When you’re looking into financing possibilities for your company and don’t want to take out a traditional loan, invoice factoring could be a good option. With these key facts in mind, you can choose the right arrangement for your situation.