From what many experts say, it appears the clouds are lifting from over the economy. Banks are recording record profits, stocks are on the rise and the Dow is touching 10,000 again, however many small and mid-sized business owners on main street are not feeling the trickle down yet. It seems after being bailed out our largest corporate and banking friends have decided to hold onto their money and not share the wealth. This will change in time, but the question is when and is this recovery sustainable?
Furthermore, I believe you would agree business and consumer habits have changed. Small and mid-sized companies are adjusting to a lower gross revenue number and being forced to rebuild business models. Consumers are more focused on paying down debt than buying that new car, furniture, etc, and until they start spending again the economy will remain sluggish.
You might be thinking what does this have to do with Non Recourse Factoring? In America today, the largest corporations are demanding vendors to offer extended payment terms, and in almost all cases there is very little room for negotiation. As a result, small and mid-sized companies looking to expand by opening new corporate accounts and/or introducing new products will be expected to provide preferred credit terms. The fortune 1000 have figured out some time ago vendor financing has one huge advantage over traditional bank financing. Vendors do not charge interest for the use of the money, banks do.
Companies looking to expand in this fashion will soon understand on that day their business turns into a bank. This is a bitter sweet day; sales will go up however companies will find themselves lending their customers money to buy their products and/or services. The worst part is they will providing this money interest free. Studies show, the challenge small and mid-sized companies have when managing credit is experience because during periods of growth businesses are sales driven with credit decisions taking a back seat. Unfortunately, sometimes good companies do go south.
Understanding this is important, because even the largest companies do run into problems from time to time and find themselves financially challenged. Some will even go out of business. This is where understanding the difference between recourse factoring and non recourse factoring is extremely important. The difference is the similar to having insurance or not having insurance. When choosing a factoring company you will want to ask this question. Do you provide recourse or non recourse factoring?
Once a non recourse factoring company pays your business for an invoice, they own it. This means if your customer does not pay and/or goes out of business your company is not responsible. Put simply, the factor owns the invoice; your company keeps the advance unless fraud is involved.
When using a recourse factor, you, the customer are ultimately responsible to collect money from your customer. That means if a customer fails to pay or goes out of business the factor will sell the invoice and/or invoices back to your company. In summary recourse factors will provide funding, however you and your company are ultimately responsible for the long term credit worthiness of a customer.
How can they do this? Non recourse factoring companies insure the accounts receivable with a third party provider. Many business owners sleep much better at night knowing they have little to no risk navigating the customer credit mine field. This will be especially important as we come out of the recession due to the fact we don’t know how many good companies were negatively impacted by declining revenue and operational restructuring. Some of these companies may look good on the outside, however it will remain to be seen how well they will perform going forward. Business owners implementing non recourse factoring can grow their business with the peace of mind credit losses due to unforeseen circumstances will be limited. As they say, that’s priceless.