Factoring is a situation where the company sells its account receivable to another company in exchange for cash in advance of the accounts receivable due date for payment. The company guarantees its rights to handle its accounts receivable to the factor in exchange for a cash advance. We would see further what is accounts receivable with recourse and what does selling receivables with recourse mean.
1. What is Accounts Receivable with Recourse?
A company that factors with recourse works with a factor that advances against the account receivable and uses them as collateral to give funds. Recourse factoring needs the personal guarantee of management or the holder because the holder will have to maintain liquidity to buy back non-performing accounts receivable taken as collateral by the factor. The company might apply for the invoices if there are any unpaid due dates. The invoice which cannot be collected or if it is under dispute is sold back to the company. The recourse factor offers high advances and low factoring fees while purchasing the invoice. (See How to Identify a Stock market Bottom)
2. What does Selling Receivables with Recourse Mean?
Sales with recourse suggest that liability for the asset that is sold falls on the seller. The person who sells takes the responsibility for the negligence of the item. After selling the asset, the seller considers the risk that the asset sold could be defective or does not perform as said. The buyer has the right to ask for recourse from the seller. This means the seller of the assets is required to give the buyer by reimbursing or replacing the equal value. (See What is Poi in Trading?)
3. What does it mean to Sell Accounts Receivable without Recourse?
As you know what is accounts receivable with recourse, also note that factoring accounts receivable without recourse means that the factoring company believes in the credit risk on invoices. There will be a non-payment because of the debtors’ bankruptcy, taking the client from credit risk. (See What is Production Concept in Marketing?)
4. What is Accounts Payable?
The company and its account payable contain amounts it owes to suppliers and other creditors for things or services purchased and invoiced. Accounts Payable does not include payroll or long-term debt which includes mortgage however it includes payments to long-term debts. (See What is Empowered Consumerism?)
5. What are the Benefits of Factoring?
The benefits are: –
- Gets higher liquidity and a high portion of the equity.
- Adapt the financing needs and promote sales.
- Make use of cash discounts or any rebates by the supplier.
- Long payment terms to the customer are given.
- Bad debts can lose security.
- Deduction in the balance sheet total to improve the rating. (See Why is Quantitative Research Important?)
6. How many Types of Receivables are there?
Since we are discussing what is accounts receivable with recourse, let’s read the 4 types of receivables:
- Accounts Receivable
- Notes Receivable
- Trade Receivable
- Other Receivable. (See What is a Fundamental Economic Problem?)
7. Difference Between Recourse and Non-Recourse
Recourse factoring means that your company must buy back any invoices that the factoring company is not able to collect payments.
Non-recourse of the company means that the company speculates the risks of non-payment by the customers. (See Why people are boycotting Uber?)
8. How to find Account Receivable Factoring Company?
Many small business lenders offer this service. It includes online lenders through funds. There are so many factoring companies, for example, factoring companies for trucks where factoring costs can vary from one company to another. You can always reach out for quotations. Once you receive approval, a lot of factoring companies can finance within a few days. After you develop a relationship with the factoring company, you can reach out to them again and again. The factor will evaluate the credit worthiness of the customers before deciding to factor in the invoices. (See How to Choose a Business Partner?)
9. What is the Difference Between Factoring and Account Receivable Factoring?
Accounts receivable financing uses invoices that are not paid as collateral or securitization. The owner receives finances based on the value of their receivables. After the payment of the invoice, the business pays its fees back to lenders.
Factoring on the other hand is more expensive than financing as it takes responsibility for collecting the invoice. During non-recourse factoring, they accept the losses if the invoice is unpaid. (See What are the Benefits of Studying Business Administration?)
10. How to Discount Notes Receivable?
It is similar to account receivable notes that can be converted into cash by selling them to the financial institution at a discounted rate. Notes are sold at a discounted rate with recourse, which means that the company discounting the note agrees to pay the financial agency. This happens when the receiver disregards the note.
When the notes receivables are sold with recourse, the company that has contingent liability must be disclosed in the notes that have financial statements. (See How to build the entrepreneurial mindset?)
11. Is Factoring also a Loan?
No. A bank loan and credit cards are given based on their creditworthiness or the debt ratio. However, in factoring the credit worthiness of the customer and company is important.
So, recourse factoring is the procedure through which a client sells its accounts receivable to a factoring company to obtain quick cash. In addition, if the client does not pay within 60 or 90 days, the factor will seek restitution from the client who initially sold the invoice. Factoring can take place in both recourse and non-recourse situations.
I hope this article helped you understand what is accounts receivable with recourse, what does selling receivables with recourse mean, and what does it mean to sell accounts receivable without recourse. (Also read Why did Enron go Bankrupt?)