#Invoice factoring definition full

Collection calls from the factor to a debtor should start 40 days after the invoice was sent and continue for several weeks. Regardless of the type of account, a good factor will always make a diligent effort to collect on your invoices. A factoring company with a strong credit team can also help you avoid working with customers that have poor payment histories. It may be to your advantage to find a factor that offers both recourse and non-recourse factoring. Whether your company plans to pursue recourse or non-recourse factoring, it is important to sit down with a reputable factoring company to discuss their terms.

#Invoice factoring definition full

Because non-recourse agreements typically have a higher factoring rate (sometimes by a full percentage), it's important to determine whether the higher rate is really worth the cost. And they will limit non-recourse agreements to debtors that have a good credit rating, meaning the debtors bad credits ratings (who are at the highest risk of non-payment) aren't even eligible for non-recourse. There are usually stipulations associated with non-recourse factoring, and the situations in which you are not responsible for customer non-payment are very specific.įor example, many factoring companies offer non-recourse that only applies if a debtor declares bankruptcy. Non-recourse does not necessarily protect your company from all risk, though. Non-recourse factoring means the factoring company assumes most of the risk of non-payment by your customers.

You are ultimately responsible for any non-payment. There are two main types of factoring - recourse and non-recourse. Recourse factoring is the most common and means that your company must buy back any invoices that the factoring company is unable to collect payment on. Additionally, a factoring company will provide back-office support by managing your collections on any invoices you've submitted for factoring. But what happens if a customer's client (called a debtor) does not pay one of those invoices? The outcome of this situation will depend on the type of factoring agreement you have with the factoring company. There are multiple benefits to factoring your invoices, most important being that factoring helps you increase your cash flow for things like payroll, operating expenses, taking on new business and more.