Non-recourse accounts receivable factoring allows a business to sell its invoices to a factoring company without the obligation of absorbing unpaid invoices. If the customers break a promise on their payments because of bankruptcy, losses are absorbed by the factoring company, leaving the business unharmed.
This may sound very interesting and lucrative. However, I read a quote which said, “If you make financial decisions with immaturity, you will be broke your whole life.”
So before you pounce on the opportunity to gain quick cash by using factoring services consider two main drawbacks of factoring:
It can be more expensive when compared to traditional bank loans.
Your clients might not take favorably to delivering their invoices off to a third party, which may not treat them the same way you would.
Therefore, it is crucial that you work with an experienced, large factor. More experienced factoring companies can offer lower rates. These same companies also understand the utmost importance of all relationships during the transaction and work with a soft touch. They treat your valuable client just like it is their own.
There are many benefits of Non-Recourse A/R Factoring Company, which makes it a popular choice in today’s competitive environment. The most notable benefit of using a factoring service is that it gives you almost immediate access to the cash you need. This option of financing does not require any collateral. Utilizing the services of the factor, you can save the time you were spending otherwise, to follow up, manage and collect invoices.
Another notable advantage is the factor does not weigh heavily on credit history. Bank lending is based on the creditworthiness of the business owner. In contrast, factoring services shift the focus away from the history of your business and place it on the value of your accounts receivable.
Making the Decision
Now to help you decide if this is the right option for you, ask yourself “What are the opportunities you would miss out by not factoring”? Is a new product launch or business growth plan in your mind? Then, receivable factoring services may prove to be a right choice for you. However, when you shop for a suitable funding program, you will realize that not all factoring companies are the same.
Factoring rates, fees, and agreement terms are incredibly competitive. It is so aggressive that knowing you qualify for a range of factoring services will surprise you. However, not all will provide the same level of service and cost-effectiveness. Hence, use your ‘right to choose’ effectively before you get into any agreement. Ask yourself the following questions to make informed choices:
- What is the fee structure?
- Are the terms and conditions flexible?
- What is the industry experience of the factor you are entering into a contract with?
- Does the factor have the potential to fund your invoices when you grow in the future?
- Since factoring is expensive than a bank loan, factors provide many valuable back office services. Consider what additional products and services will the factor offer you?
- If any, what setup costs does it include?
A little research can help you choose a factoring company that is the right fit for your business. Review, ask for references and speak to a representative of a factoring company to compare the pros and cons.