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Business Duty Officer

Factoring. Factoring with or without recourse

Factoring. Factoring with or without recourse

Factoring is another effective way to attract finance to the business. In comparison to loans, the factoring procedure is almost always simpler and less risky. Factoring is suitable for companies, who work with networks and are forced to regularly provide a deferral of payment. This is almost always a network requirement, in connection with which the supplier company forms cash gaps, which may have a negative impact on its subsequent transactions.

Factoring is the exchange of future revenue for money. You have sold goods with a deferred or installment payment and invoiced the customer. This invoice is a promise of your future earnings, but you haven't received money from the customer yet. The factoring company takes the invoice and pays for it before, your costumer does. This is how between the seller and the customer appears an intermediary - a factor.

In order to choose the right financing instrument, you need to know , that factoring can be with or without recourse.

Factoring with recourse is usually cheaper , than without recourse, and it is easier to obtain. When factoring with recourse, the receivable is kept on your balance sheet. With the first payment you don't receive all the money, but only a part of it. If the buyer fails to pay on time, If the buyer fails to pay on time, the factor makes a reverse concession, i.e. turns your factoring into a loan - requires you, to return the first payment and pay a commission for using the money and handling the documents .

Non-recourse factoring is more reliable, in its essence it's similar to an insurance policy, where you have already been reimbursed. The factor redeems your accounts receivable on its balance sheet. The factor can pay you the full amount with the first payment. If the delivery is not paid, the factor is left on its own with your customer-buyer , you don't have to repay the factor. Factoring without recourse reduces the financial risks of the supplier , to zero, but, , usually, costs more.

Thus, we can conclude , that factoring can be a good and profitable alternative to credit, if you choose counterparties and partners with due diligence, as well as carefully read all contract terms and plan financial income.

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