When learning more about receivables factoring you will discover there are a couple basic types of structuring the deal.
The first is called FULL RECOURSE factoring. The greater majority of factoring companies provide full recourse factoring. This means at 90 days past due you ultimately owe the repayment of 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 category is called NON RECOURSE factoring. This means that the factoring company agrees to purchase the invoice from you and takes complete responsibility for its repayment. If the customer does not pay, it’s not your problem…. except if there is a performance or warranty problem. In other words if anything at all is wrong with the product or service, you are still responsible for the advance you received otherwise the factor is on the hook for the advance.
At first glance non recourse sounds better than full recourse. But the fees for the non recourse are significantly higher than full recourse. So over a period of time it will cost you more to your bottom line.
Additionally factors offering full recourse factoring always do extensive credit checks on the customer before they will make an advance, plus verify the invoice with the customer. 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.