Recourse factoring versus
non-recourse factoring
What your factoring company may not be telling you
about your Non-Recourse invoice factoring credit
facility.
By: Michael Pickels
It is a popular misconception, promoted by those
in the know, that non-recourse financing
transactions common to the Invoice Factoring and Asset Based
lending industries are a virtual magic pill for credit
concerns.
Unsuspecting entrepreneurs are lead to believe that they
will not be liable for any losses incurred should their
debtors fail to remit payment to the lender under a
non-recourse financing arrangement or factoring
line. Often
they are convinced to pay a bit more for this non-recourse
service over a more typical recourse financing
transaction.
After all, for a growing business the offer of freedom from
worry about the payments of their customers and the ability
instead to focus on the sales, health and longevity of the
company could be likened to the discovery of Business’s Holy
Grail. What
business owner wouldn’t want this service?
The sad fact though is that this is not the
case. While
a Factoring Company’s underwriter may tout the benefits
of the service, the devil is truly in the
details. As
it turns out, non-recourse lines only
cover very specific instances of non-payment. Most often non-recourse
deals coverage is limited to actual bankruptcy filings by
the debtor companies. What this means is that
the lender is really only at risk of liability for the
lack of payment if they’ve allowed a company on the verge
of bankruptcy to run up a large balance on their client’s
books. Not a
smart move, and they know this. Consequently it is in
the Lender’s best interests to be very conservative when
establishing the credit limits for their Client’s debtor
companies.
In the end a service that was sold as a “small price to
pay” for peace of mind ends up being of little or no real
benefit and often actually impedes the Client’s growth
due to the overly conservative credit constraints imposed
by the lender in an effort to better their interests by
mitigating their credit exposure.
The factoring industry has gotten a bad rap in
years past for high rates and less than truthful marketing
efforts. Don’t
be discouraged if you’ve been approached with a non-recourse
deal, weigh your options carefully. Find out everything you
can about your potential financial partner. Most importantly ask for
references.
There are invoice
factoring companies out there who will be upfront and
honest in their description of services and the rates you’ll
be charged. If
you think you’re being taken for a ride you’re best advice
would be to take a step back and call a few other factoring
companies for a comparison. If you’re already
factoring don’t forget to price shop. Accounts Receivable
Finance is a very competitive industry and you’d be
surprised how far your lender may go to keep
you.
Michael Pickels is
the COO for Business to Business Capital Corp
– America’s Friendliest Factor. Please
visit BTB Capital Corp at http://www.btbcapital.com to receive a no cost, no obligation proposal for
factoring or contact us.
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