For your business to flourish in spite of supplying to credit customers on a regular basis, you will need to have ready cash in your hand every time you need to pay your suppliers and your employees, and even take care of routine expenses. Business factoring is one such method that could solve this problem.



You could approach your bank for a loan to enable you to have access to ready cash, every time you need it. But, your bank will need collateral as security against any loan and you will also need to submit the audited accounts statements of your past 3 years, which would be very difficult, even if you have to break-even in your business or if your business is newly established. You would need to pay back the loan amount along with interest within the specified period in a specific manner. Thus, this mode of finance is quite rigid and there could be too many hurdles to cross, before you could lay your hands on the money.

Business factoring is a better option, where a factoring company 'buys' your credit invoices of you and then wires the invoice amount into your bank account within a span of 48 hours after subtracting their factoring fee, which could range from 1.5% to 5% based on certain conditions set by the factoring company. The factoring company would also provide you with a choice of recourse or non-recourse factoring.

Recourse factoring is where the factoring company provides you with the deducted invoice amount, once you submit the credit invoice of your customer to them. However, the risk of collecting the invoice amount would still lie on your head. You would need to follow up with your customer on the due date and when you receive the invoice amount in your business name, then you would have to transfer that amount to your factoring company's name immediately, since that money was already been provided to you. If however, your customer failed to pay you the invoice amount on the due date, then you would have to pay interest on the invoice amount at a predetermined rate. The factoring company might also retain a certain percentage of the invoice amount over and above the factoring fee to be adjusted in case of such a problem. The factoring fees for recourse factoring are however lower than that of non-recourse factoring.

Non-Recourse factoring is when the factoring company assumes a limited risk of collecting the payment from your customer. Thus, in case the customer files for bankruptcy before the due date, then you could still be safe. But, this method still does not protect you, in case the customer delays while making the payment. The factoring company virtually takes over your collection department and has a free rein to pursue your customers, in order to collect your payments and can even take legal action against erring customers. The factoring fees are naturally higher in such a setup, since the risk factor for the factoring company is also higher. Since the invoice amount is collected directly by the factoring company, there is no question of any adjustments to be made, in case the customer pays on time.

You can therefore make an informed choice of either entering into recourse or non- recourse agreement with your factoring company based on your assessment of the risks associated with your business.