Sep 14
Factoring Companies…They Are All The Same Aren’t They?!??!
When is factoring not factoring? Know the difference and don’t pay the price for not knowing!
I had an interesting meeting with my friendly man from HSBC yesterday and one of the things discussed was factoring (invoice financing). I asked him what was the point in paying for factoring if the factoring company was going to come back to you for payment if your client refused to pay up after say 90 days!?!!? He explained that essentially there are two types of factoring – Recourse factoring and Non-Recourse factoring.
So what does all this mean? Well it might surprise you to learn that most factoring companies either offer one or the other – rarely both.
Recourse Factoring
With this method if the debtor (your client) does not pay the invoice, recourse factoring allows the factoring company to come back to the seller (you) for payment. The risk of insolvency does not transfer to the factoring company when an invoice is purchased. If a client refuses or is unable to pay the invoice (due to bankruptcy), you (the seller) must buy back the unpaid invoice or exchange it with another receivable of equal or greater value. Since Recourse Factoring offers the least amount of risk to the factoring company, then this factoring agreement offers the lowest fees.
Non Recourse Factoring
With this method, the risk of insolvency and non-payment is completely transferred to the factoring company. If the client goes bankrupt or refuses to pay the invoice (for whatever reason), the factoring company cannot come back to you for payment. This method of factoring carries more risk for the factoring company and therefore factoring fees are higher.
Most factoring companies only offer Recourse Factoring and do not offer Non Recourse as an option. However my man at HSBC reliably informs me that they offer Non Recourse factoring so this probably explains why so many of my clients say that HSBC is expensive in comparison to others. But to my way of thinking what’s the point in having a factoring agreement if you are then going to be held liable for non payment of invoice?
About the author: Paul Stanford http://www.paulstanford.co.uk/blog has provided practical advice to hundreds of entrepreneurs for the past 5 years helping them to successfully start-up, transform and sell their businesses. Get in touch to see how his business http://www.4momentum.co.uk can help do the same for you. You have full permission to reprint this article provided this box is kept unchanged.
Copyright 2008 Paul Stanford
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