The crash course on recourse factoring

It’s quite clear that there are a lot of nuanced and overall misunderstandings flowing around, related to recourse factoring. Ranging from the differences between recourse and non-recourse factoring all the way to evaluating the benefits and cons of this financial service, there are misconceptions and false information to watch out for. In this article, we’ll be looking over what recourse factoring is, what are the pros and cons of this service and how it compares to non-recourse factoring. So, let’s begin!

How to explain recourse factoring?

In general, recourse is a term that’s used to describe a type of loan (e.g. factoring) where the client of the factor will have to cover the losses, incurred by the factoring company if the client does not pay.

But what about factoring, in general? What is it and why do recourse and non-recourse types of this financial service exist? To begin with, factoring is a financial service that’s used by businesses that are looking to boost their cash flow and improve financial stability. A lot of the time, businesses have really good relationships with clients or operate in a market niche where flexible payment schedules are common. This usually means that a client has a longer time (usually, anywhere from 60, up to 180 days) to make the payment. While this is great for maintaining good relationships, it’s not something that’s particularly excellent for your cash flow.

This is the primary reason why companies turn to non-recourse or recourse factoring. They don’t want to jeopardize their relationships with customers but are in need of stable cash flow. Thus, when going into a factoring agreement, the company sells its accounts receivables (invoices) to a factoring company. In exchange, the company which does the factoring obliges to quickly pay the amount in the invoice to the business minus the factoring fee. This way a business can quickly get 85-95% of the total amount it is owed within 1-2 business days instead of having to wait for months.

The main difference between non-recourse and recourse types of financial factoring is the terms & conditions and the solutions in case of disputes. If we’re talking about recourse factoring, this service is usually a bit less costly and easier to obtain but in case of disputes and customers failing to meet obligations to the factoring company, your business has to cover the losses.

Pros & Cons of recourse factoring

If we were to take a look at recourse factoring from a neutral standpoint, we’d be able to see the benefits and drawbacks of this financial service. So, to help you out, we’re going to list them.

Pros

• Easier to obtain rather than non-recourse factoring
  • Requirements for clients (for volume) are usually lesser than with non-recourse options
  • More open factoring company mindsets because of the lesser risk
• Smaller fees than non-recourse variant
• Less intrusive communication with the clients of the business

Cons

• In some cases, fixed monthly or periodic fees
• Limits on sales concentration
• In case of disputes, the business (client) suffers huge losses because it has to absorb the loss, sustained by the factor

Overall, as with seemingly everything in the business world, recourse factoring does have significant benefits and noteworthy downsides that you need to be aware of. If you’re in the know about the opportunities and risks, you can make a more informed decision on whether to choose a factoring service.

From the standpoint of a factoring company, the pros are usually related to building a sustainable and mutually beneficial relationship with your client. If businesses go into a factoring agreement with you, they’re highly likely to continue with that relationship for a while. Furthermore, in the long run, it’s a very profitable business venture, meaning that providing a factoring service is a very insightful choice. In terms of drawbacks, factoring companies have to deal with a lot of administrative tasks and need sufficient resources to take care of the paperwork and offer efficient financial benefits to their clients. Thus, they’re usually in need to employ dedicated factoring software. Using it, the workload intensity is decreased, making factoring management simpler or more straightforward.

Non-recourse or recourse?

Clients are more likely to lean towards non-recourse options whilst factoring companies are always more eager to give out recourse factoring services. Both options do have their pros and cons, but if a business is in good financial standing as has met the necessary requirements, it will likely be given the freedom from the factoring company to choose an appropriate service.

It’s a dilemma that relates to the financial status of the business and the details of the offer. In some cases, recourse factoring might be much more suitable while in others, only non-recourse solutions are viable.

Proper management of recourse financial services with SOFT4 Factoring

For factoring companies, administrative worries never end. With every new client and every new contract, there are ever-increasing administrative burdens to worry about. This is why every factoring company should consider implementing factoring software in their day-to-day business practices. These tools are developed with the idea of simplifying and streamlining data management tasks. Every factoring company will save tens if not hundreds of hours of time by automating process management with state-of-the-art recourse factoring software.

To begin with, you’re going to have an easier time setting up new projects, tasks, assigning items to your staff members, and linking cases with related documents. Generate reports and make calculations with a few simple clicks instead of doing it manually. SOFT4 Factoring can include variables to make your risk management and forecast much more precise.

It’s built on top of the Microsoft Business Central 365 platform which means that users will feel familiarity with Microsoft Office applications like Excel, Word, etc. This attribute makes such software easier to implement and simpler to get the most of. In the end, SOFT4 Factoring offers open invoice management, high-end data tracking, multicurrency support, insightful calculators, automated document management along with general ledger integration, and much more.