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

For a business, whether they are a start up business or an established business cash acts as their lifeline; it is the one aspect that allows a business to survive. The amount of cash that a business has at its disposal often demonstrates the health of a business. A business, especially a start-up business would be able to survive for a while without sales or profit but without cash it will fail.

In order to give your business the best possible chance you need to have sufficient control over the cash flow that is going into and out of your business. You obviously want to have more cash going into your business than out of your business but to ensure that this is the case you need to have a good grasp of the cashflow that your business has. You need to have a good idea of your cashflow if you are thinking about expanding or if you wish to borrow some extra money. To aid this estimate of your cashflow it is a good idea to keep your receipts as they will demonstrate examples of some of your expenditure.

An important aspect to remember is that there is a difference between cash and profit. In order for a business to make a profit it needs to produce and deliver goods or services to customers before you actually make a profit so if you don’t have the cash to do this then you technically won’t have a business left to run. If you want more evidence of these just look at the facts; the reason that most businesses fail is poor cash management that has led to a business not being able to afford to carry on and poor cash flow is the reason that the majority of start-up businesses don’t make it past their first year.

Some examples of the cashflow that will be coming into your business include the following:

• The payment for goods/services from your customers
• Any bank loans that you may have taken out
• The interest that you collect on savings and investments
• An increased bank overdraft or loan

Some examples of the cash that will be coming out of your business include the following:

• The purchase of any stock, raw materials or tools that your business needs
• Your staff wages, property rent and all of your daily operating expenses
• Any repayments of loans that your business may have
• Any dividend payments
• Income tax, corporation tax, VAT and other taxes
• Reduced overdraft facilities

In order to have a good cashflow within your business you need to ensure that your pattern of income and your business spending habits allows you to have cash available as well as being able to pay the bills on time. Cashflow depends on the timing and amounts of money flowing into and out of the business each week and month.

In order to help you with your cashflow management it is a good idea to keep an up-to-date record of all of your cash so that you can see exactly what is coming in and going out of your business. By doing this you can find ways of potentially improving the cashflow of your business.

Helen is the web master of Angel Start-ups, specialists in all aspects of business finance, which includes Cashflow Management.

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