Long-standing businesses understand the complicated nature of financing quality products and services. These businesses also understand that the financing needed to continue providing business related products and services can be a bit challenging. While there are many reasons for this, one particular instance is when outstanding invoices or customer accounts aren’t paid in a timely fashion.
Solutions to Your Cash Flow Problems
Many new to the business industry will be happy to know that there are viable and business savvy solutions to this particular predicament. This solution is known as factoring. This is where outstanding invoices are leveraged for business loans that provide the necessary cash to continue providing products and services. However, there are a few options a business will have when it comes to factoring.
The most common type is known as recourse factoring. This is where a percentage of the outstanding invoice is loaned to a business with the inclusion of interest rates and transaction fees. Once payment for the invoices have been received by the business, the factor is repaid for the loan. However, in situations where the invoice owner never pays, recourse factoring allows the lender to pursue the business for remittance of the outstanding loan.
The other option is known as non recourse factoring. In this situation, the lender or factor takes possession of the outstanding account or invoice. They handle the collection process and if the owner of the invoice fails to pay, since the factor technically owns the invoice, they have no recourse to pursue the business for repayment of the loan.
This is a bit risky for the factor, which is why the cost for these types of loans are a bit higher. In addition, the higher fees are typically used to cover factoring insurance to guard against an invoice owner defaulting on their repayment. This allows the factor to be made financially whole should a default occur.
There are a number of things to consider when it comes to this type of transaction, which is why a business will first need to determine if this is the right option for them. Secondly, it will be important to do some homework to choose the right factoring company. There’s plenty of advice given here that can help a business do their due diligence to ensure they choose the right factoring partner.