Two Reasons to Use Recourse Factoring
A common finance option for many businesses, factoring allows a business owner to sell his or her unpaid invoices to receive working capital more quickly. This allows the business owner to receive money right away, not to mention saves them time since they do not need to handle any of the administrative work related to the invoices once sold. These invoices are sold with full recourse, which means the company can return the invoice to a customer in certain circumstances. There are two very common reasons for recourse.
Reason 1: Credit Problems
Although they represent a small portion of recourse cases, credit problems are still the second most common reason for invoices to be returned. Lending companies understand how to evaluate credit profiles and determine how likely a client is to pay. If the clients are too risky, the company won’t pay for the invoices. However, you do have an option. Non-recourse factoring allows for some protection in the event that the customer defaults on paying his or her invoice. However, each company does non-recourse differently, so be sure to ask questions and read the fine print before signing yourself into this type of contract.
Reason 2: Customer Disputes
The majority of invoices that aren’t paid on time are late because the customer has a dispute with his or her invoice. Many times, the dispute occurs because of a misunderstanding that can be fixed. However, sometimes, the invoice issue is a much larger misunderstanding that leaves the customer and the factoring company unable to find common ground. When this happens, the company will likely sell the invoice back to the borrower.
Preventing Recourse Issues
If you want to sell your invoices, it is important to know how to prevent the possibility of recourse issues. You can avoid disputes by ensuring you communicate well with your customers and provide all important information within the invoices and contracts you have them sign. A verification letter can also be helpful because it can minimize misunderstanding-related disputes. In terms of credit issues, the best idea is to avoid selling the invoices of customers who have had trouble paying their invoices on time in the past.
Factoring is an excellent way to bring in fast money for your business. Use the working capital you receive to pay employees and vendors. Purchase new inventory, remodel, advertise, and much more. Just remember to sell your invoices smartly to prevent problems in the future.