Account receivables financing is a powerful tool that can make business easier for companies of many different kinds and situations. While many businesses do make productive use of this option, some are put off by the foreign-seeming nature of the arrangement.
In fact, this type of financing, which is generally known as “factoring,” is very easy to understand. Only a few basic concepts need to be mastered before any business can make use of it productively.
Standard or Spot? Recourse or Non-Recourse?
There are two basic types of factoring agreements, with each entitling the factor to the right to collect on certain invoices:
- Standard factoring arrangements involve the signing of a contract that has the factor receiving some or all of a particular client’s invoices going forward for some defined term. For a business where being able to convert most invoices into cash immediately will be valuable, this style of factoring can deliver various benefits.
- Spot factoring does away with the long-term contracts and associated obligations in favor of one-off deals. With each factoring arrangement being negotiated individually and only when needed, this is a more flexible take on the service that also frequently makes sense.
Both of these two basic kinds of factoring can be found with related terms that can also make a difference. One of the most important of these is the distinction between these recourse and non-recourse factoring:
- Recourse factoring acts a bit like a traditional loan, with the failure of the original invoice recipient to pay up allowing the factor to come after the client that issued it. Because this will involve less risk for the factor, terms will sometimes be more generous.
- Non-recourse factoring has the factor essentially buying the invoice outright from the start. From that point forward, the company that sold it is relieved of all associated obligations.
The Right Type of Factoring Can Make a Real Difference
With factors differing in numerous other ways with regard to how they prefer to offer their services, businesses generally have plenty of interesting options to look into. Finding and making use of a suitable type of factoring can make business far easier, whether in the short term or the long run.