As soon as I realized that my personal financial picture was a little bleak, I started thinking about taking out a personal loan. I wasn't really looking forward to going into debt, but I knew that if I wanted to solve a few short-term problems, a loan would be the way to go. I talked with a few of my local financial institutions to get a good idea of what they could offer me, and then I sat down to go over the paperwork. It was incredible to see how much money I could save by securing a lower interest rate. Check out my blog for more information about loans.
Factoring is a process that involves selling accounts receivables for cash, and it can significantly improve the cash flow of a business. Through factoring, a company is able to collect accounts receivables right away, which is why a lot of trucking companies use it. If you currently do not use factoring and would like to start, there is one key aspect of factoring you should examine when choosing a company to use for your trucking business. This aspect involves the differences between recourse factoring and non-recourse factoring. Here are three key differences.
The Way Bad Debts Are Handled
The major difference between recourse and non-recourse factoring is the way each type handles bad debts. Non-recourse financing is often the preferred method, because this method requires no action if a company does not pay a bill that you factored. This means that when you receive money from the factoring company in exchange for freight bills customers owe, you will never have to return a dime of it. You will never have to worry about bad debt expenses if your factoring company offers non-recourse financing.
With recourse factoring, each time a customer does not pay his or her bill, the factoring company can charge you for it. This means you will have to reimburse the factoring company for the bad debts you incur. This is why this method is not typically the preferred method; however, this is actually the more common method factoring companies use.
If this is the method you choose when you select a factoring company, the terms of bad debts will be explained to you up front. Typically, the factoring company will state that when a debt is a certain amount of time past due (such as 60 or 120 days), it is considered a bad debt that you must repay.
The Discount Rate
While non-recourse factoring may seem like the better option, it's important to understand the differences in discount rate between recourse and non-recourse factoring. A discount rate is always used in factoring, and this rate basically represents the profit a factoring company makes by purchasing accounts receivables. The discount rate will affect the actual amount of cash the factoring company will pay you for your invoices.
Recourse factoring typically has lower discount rates than non-recourse factoring. For example, when you factor with non-recourse factoring, you might receive 70% to 85% of the total amount of the invoices you factor. This means the discount rate is between 15% to 30%. With recourse factoring, you might receive more than 85%, which means your discount rate will be 15% or lower.
In other words, you will pay a higher price for non-recourse factoring, and this is because of the higher amount of risk the factoring company assumes when purchasing your receivables.
The Reasons For Choosing One Or The Other
Both types of factoring are good; however, there are times when one type is better than another. Recourse financing is a great option when you do not expect to have a lot of bad debts. If you feel that your customers are trustworthy and will pay their debts, choosing recourse financing is the better choice. Not only will you receive more money upfront from the factoring company, but you will also have a low risk of having to repay bad debts.
Choosing non-recourse financing is often the better option for a business that expects to have a lot of bad debts in the future. With this option, you will reduce the risks of losing money from bad debts.
Factoring companies do not always offer both options, though. If you prefer one over the other, you may have to look around to find a company that offers the option you want. To learn more, contact a factoring company, such as Factor Loads, today.
Share16 March 2016
