Factoring Without Recourse Explained

Factoring Without Recourse Explained

Factoring agencies are now the kingmakers of the business finance world, and it would seem that many companies have managed to succeed only with the assistance of these agencies. You have to hand it to the factoring agencies, they really know how to market themselves, and how to make a solid impression. Through a careful blend of strategic marketing and the provision of quality services, the factoring agencies are now the de facto rulers of the business finance market.

One of the worst mistakes a business owner can ever make is to assume that all factoring agencies are created equal, and that they all have the same requirements, and provide the same quality of service. This is a highly competitive market (bordering upon cutthroat) and so this means that the business owner will be able to find the factoring agency that most closely suits their current needs and requirements.

Eager to save money, wherever and however they can, many business owners have actively sought to hire only those factoring agencies that provide factoring without recourse services. But what exactly is factoring without recourse?

The nature of factoring is such that the client will sell their invoices to the factoring agency who then assumes control and responsibility for the collection process. With factoring without recourse, the factoring agency will assume all the risks as well, and so in the event that a customer specified within an invoice does not pay up as and when required, this bad debt stays with the factoring agency. In effect then, the client company will be able to wash their hands of any bad debt.

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On paper and in theory, it would seem that this is a very one-sided benefit, in that the client company has the assurance of not only the work being carried out for them, but also ensures that they do not need to contend with the risk of a customer defaulting on the terms of the loan. In reality however, the factor will try and claw back their money in some way, and so they will either charge a higher commission for the services they provide, or they will provide a smaller quality of service.

In addition, a factor that provides factoring services without recourse will also typically be less forthcoming and generous with the amount of money that they provide to the client company upon initial delivery of the invoices in the first instance.

There are some types of industries and markets whereby factoring services without dependence upon recourse is not only normal, it is downright essential, and so the factoring agencies involved in such markets are generally more accommodating. Some markets that are so affected in this manner include the freight and delivery market.

Ultimately, the final decision can only ever be made by the business owner. Only they will be able to weigh up all the facts, along with the benefits and drawbacks of each of the various methods of factoring, and then make a decision based from there.