Just like any type of financing, there are many different ways a factoring line of credit can be set up. A good factor should work with a business to tailor the factoring line of credit to fit the business. If not, neither party wins.
One of the first items to consider is if the debt will be recourse or non-recourse. Both have their advantages and disadvantages which are described more fully below.
Recourse factoring is now the most common type of factoring transaction in the United States. This factoring transaction allows the factor to go back to the seller if payment is not received (normally after a 90 day period). The credit risk does not transfer to the Factor during the recourse factoring process. Normally, in the event of non-payment by the customer, the seller must buy back the invoice with another invoice (credit worthy).
Recourse factoring is typically the lowest cost for the seller because the risk for the factor on the funding transaction is lower.
NON RECOURSE FACTORING
Non recourse factoring puts the risk of non-payment fully on the factor. If the customer does not pay the invoice, it’s the factors problem to deal with and they cannot seek payment from the seller. This often seems like a great way to go, but the factor will only purchase solid credit worthy invoices and often turns away average credit quality customers. The cost is typically higher with this factoring process as the factor assumes greater risk.