Non-Recourse Factoring

Non-recourse factoring is the sale of invoices at a discount to a factoring company, which is a type of financing company that specializes in these transactions. It provides the seller with the following benefits:

  • Transfer of total commercial credit risk
  • No chargeback (no recourse) if the invoices are not paid
  • Credit insurance at a fraction of the price

What is Factoring?

Factoring accounts receivable (also called invoice factoring) is the sale of pending invoices to a factoring company (factor), which is a type of financing company that specializes in these transactions. It does not involve taking on debt or diluting equity. By using factoring – which can monetize invoices in 24 to 48 hours – companies can obtain funds to fuel growth, invest in new projects, hire more staff, buy supplies in bulk, and/or stabilize cash flow.

Factors typically charge a 1% to 5% discount rate for their services. Unlike bank financing, factoring does not take into account the company’s creditworthiness. Instead, it relies on the credit history of the company’s clients (referred to as account debtors) who are responsible for paying the invoices. As such, it is a better-suited alternative for business-to-business (B2B) companies that tend to have a lower risk profile than business-to-consumer (B2C) companies. Companies in all stages of growth – including startups – and across a wide range of industries are good candidates for factoring as long as they have creditworthy account debtors and terms longer than 30 days.

Industries That Use Factoring:

  • Information Technology
  • Freight & Transportation
  • Government Contracting
  • Manufacturing
  • Agriculture
  • Oil and Gas
  • Payroll & Staffing
  • Telecommunications

Non-Recourse vs. Recourse Factoring

Factoring can take one of two forms:

  1. Non-Recourse Factoring: The factor buys the invoice from its client and becomes responsible for its collection. This eliminates the risk of non-collection for the business.
  2. Recourse Factoring: The factor lends its client against a pending invoice. If the invoice is not paid within a specified time period, the client has to replace it with a new, creditworthy one or pay back the factor.

Key Differences:

  • Risk Level: Non-recourse factoring eliminates the risk of non-collection, while recourse factoring implies a shared risk burden.
  • Fees: Recourse factoring might feature lower fees due to the lower level of risk. However, fees vary depending on the industry, client’s credit profile, and invoice details.
  • Benefits: Non-recourse factoring acts as credit insurance for your business, protecting you from unpaid invoices even if your client files for bankruptcy.
  • Commonality: Around 90% of factoring companies only offer recourse factoring. BigFish Capital offers non-recourse factoring, alleviating any potential headaches associated with invoice collection.

Case Study: Trucking Company in Need of Cash

A trucking company experiencing rapid growth due to the shale oil boom in Texas used non-recourse factoring to alleviate cash flow problems. The company needed to hire specialized water hauling trucks and man them for 12 hours a day, but its clients took more than 60 days to pay.

To fund the cost of the trucks and fuel ($10,000), the company secured a factoring line at a 2.19% monthly discount rate. Here’s how factoring benefited the company:

Factor accounts receivableDo nothing
Potential gross profit$10,000$0
Less cost of factoring$438$0
Net earnings$9,562$0

Example of Non-Recourse Factoring:

  • Invoice Amount: $10,000
  • Advance Rate: 80% or $8,000
  • Reserve: 20%, or $2,000
  • Fees: Monthly fee of 2.19%
  • Type of Arrangement: Non-recourse

In this scenario, the client pays $219 per month for the factoring service until the factor collects on the invoice. Once the invoice is collected, the remainder of the reserve is returned to the client. If the factor is unable to collect, there is no additional charge to the client.

Five Things to Look for in a Factoring Company

  1. Experience in the Factoring Market and Your Industry: Look for a factor with a long history and experience in your industry.
  2. Quality of Customer Service: Exceptional customer service is crucial for both you and your clients.
  3. Transparency: The factor should offer online account access and a detailed breakdown of fees.
  4. Type of Factoring Offered: Non-recourse factoring may be advantageous for businesses looking to insure their invoices against non-payment.
  5. Flexibility: Avoid factors that require long-term commitments, monthly minimums, or excessive fees.

Conclusion

Factoring can be an attractive alternative when a company needs cash to fund its ongoing business or fuel growth. Non-recourse factoring transfers the credit risk from the business to the factor and may still be valid even if the counterparty files for bankruptcy. While it might feature slightly higher fees, the benefits often outweigh the costs. BigFish Capital works with you to evaluate your particular situation and structure an arrangement that’s best for your business.

Contact BigFish Capital today to get started with non-recourse factoring!

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