Non-Recourse Factoring Keeps a Business Running With Sufficient working Capital Factoring is a financial service where business entities sell their invoice receivables to a financial company (Factor) at a discount to improve its cash flow. . Factoring can be recourse or non-recourse. Though both provide constant cash flow, there are differences between them. In recourse factoring, there is an agreement between the factor and client where the client needs to buyback unpaid bills which are receivable from the a factor. The credit risk remains with clients when debtors do not make payments. In non-recourse factoring, the factor and client agree wherein the factor bears the obligation to absorb the bills receivable that are remain unpaid. The business stays unaffected by unpaid invoices.
Non-recourse factoring explained In non-recourse factoring, a factoring company purchases all or some of the account receivables of the clients. Theoretically, a non-recourse factoring means when a debtor does not pay the invoices, the factoring company shall consider the loss on the invoice and not the client. It means the factoring company insures the receivables for the factoring client. The contracts of non-recourse factoring are little more expensive compared to a similar
contract wherein the factoring company chargeback the clients on unpaid invoices. Non-recourse brings great relief to the client companies where the factoring company takes the responsibility of recovering the receivables.
What is not covered by it? Factoring is a financial instrument that a bank or NBFC can offer only by getting permission from the RBI. A typical non-recourse factoring contract does not include the following:
Receivables in respect of which the buyer shall dispute liability for payment irrespective of the reason
Invoices wherein clients have breached any of the agreement condition with the factor
Invoices that’ve been sent to the customers directly rather than routing through a factoring company. Invoices, which are offset by amounts that are due to account holders
Receivables in respect of which the client is unable to perfect title.
Advantages:
Factoring improves cash flow and balance sheet ratios of a client.
Get reliable information about a buyer’s credit worthiness
Risk of bad debts will be completely eliminated on all factored receivables under non-recourse platform
Comfortably grant & manage longer payment terms to customers
Factoring gives commercial competitiveness for client
High liquidity increases factoring clients bargaining power to get attractive discounts from their suppliers
As factoring company takes care of the buyer risk & collection services, client can focus more into the core business area.