Accounts receivable financing is based primarily on the credit rating of the company being invoiced. This allows for the client business to establish credit in their name without having to meet overly stringent regulation. The situation arises when the company invoiced does not meet the requirements of the factoring agent.
Say for example, you've created a teaming arrangement with an 8(a) company in Anchorage, Alaska. Your headquarters are in Atlanta. Your factoring agent is in Florida. Chances are the factoring agent has never heard of the 8(a) company and has no prior knowledge of their services of reputation. The factoring agent then researches the invoiced company. If he is not satisfied with the information he gets back, perhaps he pulled an incomplete file, there is a good chance that the funding will not happen.
On the flip side of this coin is a company the funding agent does know a good deal about. Unfortunately, everything he knows is negative. The company has www.751com.cn company has a habit of paying late on most invoices. In this case, you will have a great deal of trouble getting any invoice sent to this company funded by the factoring agent.
8. Recourse versus Non-Recourse
Unfortunately, businesses do fall on hard times and the companies your business deals with may be no exception. What happens if the company invoiced is unable to make payment on the invoice in question? The answer depends on the terms and conditions of the factoring line. It's a difficult situation to deal with, but one which must be addressed early on in the factoring relationship. This will help avoid nasty surprises if and when the situation arises for your company.
Recourse factoring allows the factoring agent to come back to the client company for payments should the invoice go unpaid. This can come as quite a shock to the client company if this situation is unforeseen. The client company must then pay back the funding or submit another invoice of equal or greater value. This type of funding holds the least amount of risk for the factoring agent thereby reducing the amount of fees charged.
Non-Recourse transactions transfer the entire amount of solvency directly to the factoring agent. Should the invoice go unpaid, the factoring agent cannot come back to the client company for payment for any reason. The risk for this type of factoring is the greatest for the factoring agent causing the fees to be at their highest level.
A third option has emerged to the recourse dilemma. This is the option of Modified recourse factoring. With this option the client company purchases insurance which covers all parties should the invoice go unpaid. In the event of the invoiced company filing for bankruptcy, the insurance would cover the amount of the funding.
Choosing which factoring recourse option is best for you depends greatly on your individual situation. If you feel very confident in your clients ability to repay the invoice, then there may be little question of recourse in your mind. If however, you are unsure of your client and their ability to pay timely or at all, you may want to consider your options. Many factoring companies do not offer non-recourse factoring so shop around for the company which offers the best value for your particular situation.
9. What to Look For in a Factoring Company
The use of accounts receivable financing services is a way for a business to clear up any debt they may have in addition to providing the business with money that it requires to continue to be successful. There are literally hundreds of companies nationwide which offer the service of Accounts receivable financing or Invoice factoring. Many will claim to offer the fastest turn around time on funding or the lowest rates available. Be cautious and take your time to find the right company for your individual needs.
First and foremost, become your own expert in the matter. Investigate local companies which offer this service. Is it possible to have a face to face interview with a representative? If so, what information are they willing to provide you with up front? Factoring company representatives should be able answer all the questions you will have before and during the application process. A face to face meeting can help determine whether the relationship will be a beneficial one for both parties involved.
Avoid high pressure sales techniques when seeking accounts receivable financing options. Your business is not buying a used car after all. The invoices you submit to your customers are the very heartbeat of your company. You should not feel pressured into this type of funding option. You may find that after a thorough review of all of the issues involved that invoice factoring is not a good fit for your situation. That's a perfectly legitimate position to take. No one should make you feel guilty or pressured into signing up for the funding if you are not comfortable.
Lastly, remember than the company you choose to use for invoice factoring will be one with whom you will develop a long term relationship with. Make sure that this is a company that you can trust. You need to do some research. Contact the Better Business Bureau and make sure that there are no complaints. A company should always research the accounts receivable financing company they plan to work with long before they enter into any negotiations. Contact the state business license office and make sure that it is a reputable company that has been around for awhile. Finally, ask for local references that you can call and inquire about the quality of service and the support through the overall process. No one can give a bird's eye view like a current customer.
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