Distinguishing Between Recourse And Non Recourse Business Factoring

Business factoring is when the sale of a company accounts receivable to a third party

called factor usually without recourse or a factor cannot force the seller to pay in cases of debtor non-payment. Debtors could either pay directly to this factor as stipulated in the notification basis. Or, pay a seller and this seller remits the money to a factor in case of non-notification basis. Accounting particularly American Accounting treats the receivable as sold once the factor opts for no recourse agreement.

There can be two categories in factoring: recourse and non-recourse factoring. Recourse factoring happens if a factor will not shoulder unpaid sums. In this arrangement, a factor can go after a seller if the customers defaulted in payments. Factoring arrangement will specify the length of days the amount owed is to be collected so the advances made by the seller can be paid back. Seller may or may not return the cash advanced but handling expenses and interest charges are applied in recourse factoring.

Recourse is less costly in comparison to non-recourse factor. The requirements concerning debtors as well as the programs may not be as many as non recourse. A seller assumes the risks in recourse factoring.

In some factoring transactions, settlements are required to be collected in 3 months. In addition, 80 % of accounts receivables is required to be advanced to a seller. For example, an account receivable invoice is written on a January 1 date valued at $10,000 and the factor gives seller $8,000.

A seller will collect the payment from the debtor once the three month period has lapsed since the responsibility of the debt reverts back to seller. A factoring company does not hold a claim against the customer. But since they hold the ledger for a period of three months then he needs to make calls to the customer within that span of time. This is part of their of their task as the manager of the sales ledger. The seller will have the burden to recoup the payment from the debtor.

Once 3 months expires in March 31, this seller should return to the factoring company the cash advanced valued at $8,000 even if he is not paid by the debtor. Furthermore, he needs to pay back the factor for its service charges and interest fees.

Non-recourse factoring is when the factoring organization shoulders the potential loss if the debtor will never pay up. It has particular policies when it comes to their limitations and risks, for example, the complete surrender of credit. Some companies may not cover certain issues such as slow settlement. In non recourse factoring, the factor bears possible non-payments of some customers who cannot pay off financial debt. This is why they have more charges than factoring with recourse.

This seller does not need to reimburse a factor on the cash advances for the invoice. But, and once the amount of time permitted has lapsed, seller has to pay factor fees such as interest and service charges. The factoring company in a non-recourse agreement have total rights when it comes to customers' settlement of debts. In non recourse business factoring, this privilege may include the use of legal means to impose the payments of invoices.

by: Jack Bennington

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