Factoring is highly beneficial to small and medium scale organizations. These organizations need constant cash to take care of their daily needs, and for purchases. These businesses usually have some big customers or government organizations that make the payments mostly after about 45 to 60 days. With this their cash flow gets affected. There are always those bills, monthly rentals and salaries that have to be paid. With the lack of such ready cash, the companies may miss getting bigger contracts. So how will the cash flow improve?
What you have in hand though is the invoices which are receivable after a certain number of days. These very valuable assets bring in good money. Factoring Companies help you in your times of need. They buy your invoices and give you of up 90% of your invoice value. They do the collection of dues on the stipulated dates. Generally, you can choose, depending on your needs, from two types of factoring, recourse factoring and non-recourse factoring.
Recourse factoring: The factoring of invoice involves the factoring company doing the collection job of your invoice that they have bought. When the money is given to you against your invoice, you receive a certain percentage after the money has been received from your debtor. The Factoring Company deducts a factoring fee, which is a percentage of the total amount due. In case you have opted for recourse financing, in a scenario where the debtor fails to make payment, you are responsible to make the future payment of the invoice. In short, in recourse financing the factoring company will not risk running bad debts. They will claim the money from you if your customer does not pay up. There will be some time given to you to make the payment. It is your responsibility to recover the amount due from your customer. Whether or not you are able to recover your dues, you are bound to make the payment due to the factoring company. Recourse factoring is cheaper than non-recourse and there are fewer restrictions regarding your customers and your systems.
Non-recourse factoring: Non-recourse factoring is also an option. In this case, unlike the recourse factoring the financing company assumes the risk of bad debt. This means that if your debtor fails to pay the amount on the due dates you are not responsible to make the payments. Your only liability is to pay the factoring fees to the factoring company. The risk that the factoring company takes certainly makes it more expensive than recourse factoring. The risk undertaken is that of total disappearance but not for slow payments. Though you need not pay the amount due, you are required to pay the interest amount that has been agreed upon in the contract. All the rights for collection are with the factor even taking legal action
Both of the factoring options are popular with the people. The factoring companies may undertake only one of it also. Providing both types is also a good option for these companies to cater to all types of customers including Truck Factoring. It is up to you to decide what suits your requirements the best.
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