Full-recourse factoring

What is Full-Recourse Factoring?

Full-recourse factoring is a financial transaction where a business sells its accounts receivable, which are unpaid invoices, to a third party called a factor. However, there's a twist. In full-recourse factoring, the business selling the invoices promises to buy them back if the customers do not pay. It means the risk of non-payment stays with the original business, not the factor.

How Does Full-Recourse Factoring Work?

Imagine your business sells widgets and you have several invoices that clients have not paid. You need cash now, so you approach a factoring company. In full-recourse factoring, the factor buys these invoices but holds you responsible if your clients fail to pay. The factor advances you most of the invoice value upfront. Later, you're expected to cover any unpaid invoices plus a service fee.

Benefits of Full-Recourse Factoring

Full-recourse factoring can be a lifeline for businesses needing immediate cash flow. It is typically easier and quicker than getting a bank loan. Companies might also use this service to outsource their collection efforts, as the factor takes over the management of the accounts receivable.

Risks of Full-Recourse Factoring

The main risk in full-recourse factoring falls on you, the seller. If your customers don't pay the invoices, you must pay back the factor. This could lead to a sudden financial burden. Therefore, it's critical to know your customers' payment habits before choosing this option.

Choosing the Right Factoring Service

When considering full-recourse factoring, assess your customers' creditworthiness and your own ability to absorb the risk of non-payment. Businesses with reliable customers and stable revenue streams are better positioned to benefit from full-recourse factoring. Remember, while full-recourse factoring increases immediate cash flow, it doesn't eliminate the risk of bad debts—it simply delays it.

Full-Recourse Factoring vs. Non-Recourse Factoring

Unlike full-recourse factoring, non-recourse factoring transfers the risk of non-payment to the factor. While non-recourse factoring might sound more appealing, it often comes with higher fees and stricter requirements due to the increased risk taken on by the factor.