Non-Recourse or Recourse Factoring that is the Question
The below (in bold) came from a Newsletter which I never requested to be on. I believe we have all had to delete newsletters and other spam from time to time or you get inundated and it really pisses you off, well it does me anyway!!
Yes, you have gathered it, I’m having a bitch, rant, throwing my teddy out and anything else I can think of ? My wording is in italics and I am not going to tell you the company that sent this out.
But, I am going to tell you the downside of using either Non-recourse and Recourse Factoring company, which this company has conveniently missed off. There will always be a downside, it is inevitable, nothing ever goes the way you want it to 100% or very rarely anyway, and you should always have a Plan B.
Almost everybody gets accepted for this business finance
The above title is wrong, there are so many issues relating to this type of service before you will be considered. Think RISK – Not for them (the factor) but for you!
- How long you have been in business
- Your Business/Personal Credit Rating depending on the format of your business
- What assets you hold
- How many committed paying customers you have on a monthly basis
- How much Credit you grant a customer
- What processes you have in place to safe guard your cash flow
If the finance company see you as a medium/high risk client – your interest payments and costs will be in line with that risk, they may say it isn’t but it will be.
They might give you the service but you will PAY FOR IT!!
Let’s be clear here, there are two types of Factoring Non-recourse and Recourse Factoring. With Non-Recourse, your business takes all the risk, with Recourse some of the risk falls in the lap of the factor BUT you pay more and more than likely the factor will pick and choose which businesses they will help you with (Pointless because they are the ones that will pay you and have a good credit history) There is so much Risk a factor will take. Also, be aware they may require your Debt Book to be insured, a further burden on your cash flow!!
Invoice factoring helps ambitious companies expand in grow. It works by freeing up money tied up in invoices that are owed.
I agree with this, but you better be growing and using the funds for growth and not just to stabilise the company, otherwise it is not cost effective. I have known many companies that use this type of facility and in some instances it works very well. In others though, it is a disaster, because you are on a contract and it is extremely difficult to get out of it because of the way this type of finance is set up. If you factor the majority of your invoice and you want to pull out, the figures can be daunting and it will cause major issues with your cash flow. Calculate how to get out of the contract BEFORE you get in!!
Waiting for these payments can cause financial problems and hinder the growth of a business. Invoice factoring has become much more popular since the bank restrictions on financing after the credit crunch.
Complete rubbish, businesses are looking at Factoring because they are strapped for cash and want to grow, but without an effective exit strategy this will hurt you finances if something goes wrong and you come up against unforeseen circumstances. If they say it stops Late Payment, it doesn’t. Good solid procedures with an effective Credit Management process will work far better that using this type of service.
This is how it works:
- You provide your customer with the goods or services you offer. Yes
- You the forward the invoice details to us. Yes
- We then release up to 85% of these funds usually within 24 hours. We then chase up the invoice for payment. I have never met a factoring company that actually chases invoice payments well, and I have dealt with a lot of factoring companies. They normally work on an A – Z, chasing by company name, split between Credit Controllers – you might get a phone call but it will normally be through email with maybe one call, if you’re lucky.
- Once this has cleared with us we pay the reminder that is owed to you less any charges. That is the rub, charges!! and if the payment doesn’t come in, the invoice amount is then fully withdrawn, normally after 60/90 days – it could be because your customer is disputing the service/product or they are poor payers/cash flow problems – YOU will be charged as well as losing the available funds.
As you can see it is a simple process, and something that could really benefit your business, especially if you really need those funds whether it is to pay other bills or a cash injection for your business. You need to be very confident that your business is growing, and the funds released supports that growth, if not, think again. A downturn or and industry wide problem could inevitably cause a major issue with your business, so ask yourself this: what would be the worst case cash flow scenario and how would you combat it?
The advantages of invoice factoring are:
- Within 24 hours you can gain access to up to 95% of the current value of all your outstanding invoices. Agreed
- The amount of credit increases along with the value of your sakes ledger. Agreed, but I would recommend that you do not factor all your invoices, if you are concerned only factor what your comfortable with. Make sure you fully understand the terms and conditions, if unsure get advice, it’s your business and you have worked hard to get it up and running.
- You only pay interest on what you borrow; you don’t have to borrow the full amount. Agreed, but normal drawdown of funds would be between 65/85% of invoice value
- No other assets are used as collateral. Unless something goes terribly wrong, again check the penalty clauses and they will drop you like a tonne of bricks if something major goes wrong and charge you for the pleasure.
- We offer business advice and insight. They very well might do, but be cautious, and always verify.
- We eliminate the hassle of you having to collect the invoices – we do this for you. Yes, at a price and Credit Controllers are under a lot of pressure to hit target. You would be better off using a credit controller in house, it’s more cost effective and you are in control.
- As you can pay bills with supplier earlier and buy things earlier than you may be able to receive discounts with your suppliers. You could but there is no guarantee and you need to ask suppliers the question and draw on a contractual basis.
- Improves your cash flow – also stops you getting behind on bills if you’re waiting on invoices to be paid. Yes falsely, There are better ways to improve cash flow and you stay in control
- We pay you the remaining invoice, less any charges, once invoice paid. Recourse Factoring makes up the majority accounts receivable financing. Recourse is an understanding between you and your factor that your company must buy back receivables that the factor cannot collect payment on. You, the client, must cover the cost of any invoices your customers do not pay and you will pay interest and costs on top as well as losing the agreed upfront invoice value – because they will take it away.
- It’s a cost-effective way to free up money – rather than getting into debt. I agree up to a point but stating that it is better than getting into debt is total rubbish. Proper procedures and a descent process in the business will save you a fortune if done right.
- With all these benefits it’s easy to see why so many businesses are using factoring, to pay bills, increase sales, maintain a good credit rating or take advantage of early payment option. Now tell them the disadvantages, oh you haven’t.
It is amazing how they miss off the disadvantages, I suppose in a way it is understandable. Oh one other thing – make sure they allocate correctly and not put your funds into a “Suspense Account” because they cannot allocate your funds to the correct invoice. A suspense account is held for all monies that cannot be allocated – make sure you are aware of it.
I dealt with one very major, well known brand that did exactly that and never told us about it only because I was suspicious and was not in the role long.
I am not saying don’t do it, I’m saying be very careful and don’t be pressured in to it, without knowing and understanding the pitfalls. Always have a contingency plan to get out of the contract if the business doesn’t do as well as you expected.
AND my advice try not to factor everything. To many businesses make fatal mistakes and then pay the full price of that mistake.
I sincerely wish you all the best and if you need advice or guidance please give me a shout. There are better ways of supporting your cash flow, I know I have over twenty years experience dealing with this and other business financial matters.
Graham Sands, MICM, FACP, BA (Hons)
MD, Amril Ltd