Accounts Receivable Factoring Recourse vs Non-Recourse Factoring

With receivables factoring, you are selling individual invoices, so if a customer churns, you need to replace it with an in-kind receivable. However, with receivables financing this is not the case, since individual invoices don’t matter, rather you just need to make the monthly payments. Also, typically receivables factoring is more expensive than receivables financing in terms of both the discount rate and the factoring fees. A company that has accounts receivables is waiting on payment from its customers.

The biggest strength of a factoring agreement is that it turns your accounts receivable into instant cash. A good factoring company is one that’s available to its clients when they need them. Evaluate email and telephone response times during the sales process to get a feel for how a factoring company values its customer service.

  1. Since factoring is not a loan, firms may maintain their credit scores while avoiding debt and continuous interest charges.
  2. If you don’t want your customers alerted when you sell their invoices, look for a company that doesn’t notify them.
  3. The balance of $240,000 will be forwarded by the factor to Clothing Manufacturers Inc. upon receipt of the $1 million accounts receivable invoice for Behemoth Co.

There’s no shortage of receivables factoring companies out there, but it makes sense to work with one that has experience in your industry. This means the company will already know and understand the unique characteristics of your business – you won’t have to waste time explaining the ins and outs to them. In addition to the steps above, how you document factoring receivables accounting will also depend on whether or not you’re factoring without recourse or with recourse. Each type of factoring process requires slightly different journal entries.

Specialized factoring

With factoring receivables, a factoring company purchases your unpaid invoices and pays you a portion of the invoice value upfront. The advance rate varies depending on the company, but generally ranges from 75% to 100% — or the full invoice amount — minus fees. Factoring is referred to as a form of short-term borrowing, but your company can operate under a factoring agreement indefinitely. Briefly, factoring with recourse means if your customer fails to pay to the factoring company, you’re obligated to pay the invoice back.

When you begin factoring your accounts receivable, it becomes even more complex. However, accurate accounting for receivables helps you understand the total cost to your business. Once you apply, one of our representatives will reach out to discuss the factoring fee, factoring rate, and terms attached to the sale. You’ll get an upfront breakdown of all costs, so you don’t have to worry about hidden fees. Trade credit is one of the largest sources of financing utilized in the United States in general, and perhaps the biggest source of financing utilized by businesses.

Keep in mind that invoice factoring can be expensive, and there are other options, including business credit cards, that could offer lower rates depending on your business credit score profile. It is important to note that the type of factoring influences the amount of fee charged and the amount of security held by the factor. The scenario in this example is only for the purpose of comparing the two types. The amount of security retained may be zero under factoring with recourse because the agreement guarantees the factor that any debts that may turn out to be irrecoverable will be reimbursed. As with any business contract, the parties negotiate the terms, and there are as many variations as there are transactions.

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(For example, if you had a $10,000 invoice factored with FundThrough, you’d record this as 10,000 X .0275 since our rate is 2.75 percent for a net 30 invoice.) For the amount, enter the fee amount as a negative number. At this point, make sure the net amount matches documentation from the factoring company. To make the arrangement economically profitable, most factoring companies have revenue minimums (e.g. at least $500,000 in annual revenue) and require annual contracts and monthly minimums. This reserve account is typically 10–15% of the seller’s credit line, but not all factoring companies hold reserve accounts. Due to the complex nature of receivables factoring, it’s also difficult to compare costs to a loan or other forms of financing.

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Finally, you’ll want to consider the cost of factoring when looking at factoring companies. Don’t forget that depending on the invoice factoring company, you could be looking at a high factoring fee, hidden fees, or not getting bookkeeping for nonprofits: do nonprofits need accountants the full invoice total advanced up front. Be sure to ask about all potential fees up front so that you can more easily compare your options. In some ways, the factoring company acts as your accounts receivable back office.

The financier then assumes the responsibility for collecting payment from the borrower. Typically, financiers will advance between 50-90% of the invoice value to the borrower, minus a factoring (origination) fee. Accounts receivables factoring is a financial practice where a company sells its invoices to a third-party financial institution at a discount for immediate cash. The factor collects payment from customers, and the company receives funding without waiting for payment or taking on additional debt. Triumph Business Capital specializes in invoice factoring for the trucking industry. Its website doesn’t clarify its cash advance rates or factoring fees, but does say that applications are typically processed within 24 hours.

The fee and payment structures get complicated, adding to the already complex nature of accounts receivable accounting. Essentially, the company selling the receivables is transferring the risk of default (or nonpayment) by its customers to the factor. As a result, the factor must charge a fee to help compensate for that risk. Also, how long the receivables have been outstanding or uncollected can impact the factoring fee. For example, a factor may want the company to pay additional money in the event one of the company’s customers defaults on a receivable.

Interest rates

The final accounting component is to enter the credit for when you receive the remittance amount. Accounts receivable factoring, also known as invoice factoring, is when a business sells its invoices to turn that static asset into working capital. Factoring companies usually charge a lower rate for recourse factoring than it does for non-recourse factoring. When the factor is bearing all the risk of bad debts (in the case of non-recourse factoring), a higher rate is charged to compensate for the risk. With recourse factoring, the company selling its receivables still has some liability to the factoring company if some of the receivables prove uncollectible. Selling, all or a portion, of its accounts receivables to a factor can help prevent a company that’s cash strapped from defaulting on its loan payments with a creditor, such as a bank.

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Either way, you’ll need to provide the information above and the invoice amount you want to sell. This website is using a security service to protect itself from online attacks. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. However, like any financing option, this method has its limitations and disadvantages. We believe everyone should be able to make financial decisions with confidence.

The factor immediately gives you a percentage of your accounts receivable. The percentage the lender is willing to advance is known as the discount https://simple-accounting.org/ rate and is typically 60 to 80 percent. This money allows you to fund current business operations and generate new accounts receivable.