Finance

The Pros & Cons of Non-Recourse Factoring as A financing Tool

Non-recourse factoring is slowly rising to become a very popular way for various companies to foot their bills. To put it simply, non-recourse factoring is the process by which companies sell their invoices at a discount to a factoring company in exchange for cash. It is worth noting that there are two forms of factoring, non-recourse and recourse factoring, the former being a situation where the factor buys the invoice from its client and becomes responsible for its collection while with the latter the factor doesn’t necessarily fully take on the collection responsibility. Just like any other financing method, non-recourse factoring has its merits and demerits which are discussed in detail below.

Pros

Easy To Get

It is relatively easier for a company to qualify for a factoring plan as compared to the more conventional financing methods such as bank loans. This is because the bar is lower and you require very few things such as creditworthy clients and your invoices must not be encumbered by liens. Also, the application and deployment process is simple and takes less time.

Improves Cash Flow

This is one of the most appealing things about non-recourse factoring. It improves cash flow within a company by providing immediate working capital. With this form of financing, you don’t have to worry about slow paying invoices as you can sell them to fund urgent bills such as payment of expenses as well as investing in growth.

Provides Short-term Funding

When a company is going through a cash flow problem, something that tends to happen a lot especially if most of the goods or services are sold on credit, non-recourse factoring can come in handy to save the day. You won’t have to worry about having to apply for bank loans or go through other methods of financing just so you can meet day to day expenses.

Cons

While non-recourse factoring may seem like the most ideal method of financing, it still has its shortcomings although most of them are easy to look past considering the advantages.

Factors Are More Keen

As you would expect, factors that provide non-recourse factoring are usually keener and tend to be very conservative with the invoices they buy. This is because, as we mentioned earlier, the factor is fully responsible for the collection of the debt when the invoice is due so they would like to reduce the chances of buying an invoice that may later be defaulted. However, if your clients are credit worthy, then you don’t have to worry about the factors refusing your request.

Higher Costs

As you would expect, non-recourse factoring is more expensive compared to the conventional modes of financing such as bank loans. This is because of the reduced risks and added convenience which come at a price. This method is therefore more suitable to companies that have higher profit margins because they can offset the extra cost.

Non-recourse factoring is a very appealing method to finance operations in a company especially in cases where most of the revenue received is in credit form.

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