Factoring without recourse allows businesses to sell unpaid accounts to a third party for cash flow without the risk of reimbursing the factoring company for uncollectable accounts. Negotiating contracts, avoiding old accounts, and strict credit risk management are necessary for successful non-recourse factoring. Factoring companies typically pay 70-90% of sold receivables in cash and may pay an additional percentage once the full balance is collected. Companies can dictate terms and conditions of the sale and send terms to multiple factoring companies. Factoring companies avoid extremely old accounts and clients with poor payment records and have credit rules and policies to minimize losses.
Many businesses take accounts receivable, i.e. sell their unpaid accounts to a third party, in order to generate cash flow. Factoring without recourse ensures that the third party cannot require the sales company to reimburse the factoring company for losses arising from uncollectable accounts. To implement non-recourse factoring, companies should negotiate contracts with the factoring company, avoid the sale of old accounts receivable, and promote strict customer credit risk management. Each of these factors requires more work on the front end of this process before the actual receivables are factored.
Factoring receivables are one way that many businesses obtain cash flow without having to wait for their outstanding receivables to be fully collected. Factoring without recourse typically results in a company receiving 70 to 90 percent of its sold receivables in cash from the factoring company. Some factoring companies may pay an additional percentage, such as 5 to 20 percent, once the full balance of receivables has been collected. While the vendor will pay a small fee for this service, it provides cash flow for immediate needs.
Negotiating a non-recourse factoring contract is a must. Sellers can dictate the dollar amount sold, pay percentages, types of credits available for sale, and other terms or conditions related to the sale. Businesses can also send their terms to multiple factoring companies to find the best partner for this business. Additionally, some factoring companies may have looser rules on the type of receivables they accept, providing sellers with billing for more receivables in order to improve cash flow.
Most factoring firms avoid extremely old accounts receivable or those with clients with poor payment records. For example, companies cannot bill receivables that are older than 90 days or with customers who have missed two or more payments. This protects factoring companies from taking on claims that will not result in customers paying them. Factoring companies are not necessarily collection agencies; they want to turn receivables into cash as quickly as possible. Companies that engage in factoring older receivables will typically have lower payments than receivables in good standing.
Non-recourse factoring companies can only accept credits that follow certain credit rules or policies. This ensures that all factored receivables will be collectable and that losses are minimized. Factoring companies that place these restrictions will generally cause companies to adopt or change new credit policies. These policies will apply to all customers or be grouped by credit score. Companies can then separate each accounts receivable balance and submit them to the appropriate factoring firms.
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