There are two main types of business factoring services: recourse and non-recourse. Once you have decided that a factoring company is the solution for your business financial needs, you will then need to decide which type of business factoring service will best benefit you.
Choosing which type of service is right for your business will have a lot to do with how much trust you have in your clients to pay their invoices.
Recourse factoring
Recourse factoring is like having an automobile with limited insurance coverage. If you get into an accident or damage somebodys property, then those charges will come out of your pocket.The tradeoff is that these services are generally much cheaper than obtaining full-coverage insurance.
With recourse factoring, if one of your clients defaults on a payment, the money owed will come out of your own pocket. Although this type of factoring service will initially save you money, you may eventually end up paying more if your clients are not reliable.
Non-recourse factoring
With non-recourse factoring, the factor, or insurance company in this analogy, assumes all the risk. When you enter into a non-recourse factoring agreement, the factor assumes all financial responsibility for unpaid invoices.
While this is a nice advantage to have, just as full-coverage auto insurance is more expensive than basic car insurance, you should expect to pay a lot more money for non-recourse factoring services.
Though non-recourse factoring services are more costly, if you cannot count on your clients to make their payments, it may be the best option for your business. Though you can never be sure if you will need your factor to assume all financial responsibility, it is always better to be safe than sorry.
Types of billing
Depending on your industry and your business setup, you will generally invoice your clients in one of two ways: with progressive billing or non-progressive billing.
Non-progressive billing is the act of invoicing your clients one time for one-time goods or services. This method is less expensive when it comes to securing the services of a factoring company. Companies that collect in installments or require ongoing payments for goods or services use progressive billing.
Because progressive billing generally requires more effort and ongoing contact between your client and the account receivable factoring company, using factoring services for accounts that require ongoing payments will require higher fees than the aforementioned group.