Learning about factoring invoices will uncover that there are two basic types of factoring receivables.
The first is called FULL RECOURSE factoring. For the most part the majority of factoring companies do full recourse. This means no matter what, at 90 days past due you owe the advance back to the factor. This is usually handled by swapping a new invoice to pay off the old, meaning you submit an invoice for just completed work but do not get an advance unless it is for more than the very old invoice.
The second is called NON-RECOURSE factoring. This means that the factoring company agrees to purchase the invoice from you and takes complete responsibility for its payment. If the customer does not pay, it’s not your problem…. except if there is a PERFORMANCE issue. In other words if anything at all is wrong with the product or service, you are still responsible for the advance you received.
At first glance NON sounds better than FULL. But the fees for the non recourse are significantly higher than full recourse. So over a period of time it will cost you more bottom line. Additionally factors offering full recourse always do extensive credit checks on the customer before they will pay an advance. So usually a factor can tell that an invoice will get paid by a creditworthy customer. And since you owe anyway on a problem invoice, you have to ask, how many times will one of my customers not pay because they don’t have the ability or just plain refuse to pay because they don’t feel like it? That’s when the difference between the two types comes into play.