Maintaining a positive cash flow can be challenging for any business, especially start-up organizations and those with only a few employees. When you need funds quickly, you don’t have time to go through the long and often frustrating process of applying for a bank loan. Fortunately, you have another option with invoice factoring.
Understanding the Process of Invoice Factoring
The term invoice factoring describes how one business sells an unpaid accounts receivable invoice to another business at a discount in exchange for immediate access to cash. The factoring company is a third-party organization that then takes over collecting the amount due on the invoice from your customer.
This alternative form of financing can be an especially good choice for start-ups and small businesses that have not yet built a strong credit profile. When the factoring company processes your application, it bases its approval decision on your customer’s credit and not that of your company. If you decide to go this route, it’s in your best interest to choose unpaid invoices from your most creditworthy customers.
The Difference Between Recourse and Non-Recourse Invoice Factoring
The primary difference between the two types of factoring is which party bears responsibility for repaying the invoice if your customer defaults. With recourse factoring, which is the more common of the two types, you must repay the factor the invoice value if your customer does not pay the bill. Because recourse factoring is less of a risk, it is typically easier to receive a prompt approval of your application.
Non-recourse factoring means that the company that purchases your accounts receivable invoice writes off the debt if your customer defaults on payment. You may need to purchase the invoice back in some situations. We recommend that you read all contract terms carefully before agreeing to invoice factoring to ensure you understand your own obligation.
Are you ready to explore this popular alternative to bank loans? Just contact Infinity Lending Solutions today to learn more.