What is Factoring?
This is an agreement whereby a business sells its accounts receivable to a third party monetary company. This third party company is also referred to as a factor. The reason behind this is to enable the business to acquire cash faster than it would by waiting 30 to 50 days for a customer payment. Factoring is also known as accounts receivable financing. However, factoring is not a loan because debts are not accumulated during factoring.
Difference between Factoring and a Traditional Bank Loan
- Factoring takes into account your customer’s credit strength. This is why you can qualify for factoring despite having a low credit score. However, qualifying for a bank loan demands an analysis of the company’s finances, assets and credit history.
- Factoring takes less than a week to set up an account while a loan on the other hand takes even up to two months.
- The amount of money that you are able to finance increases as your receivables increase with a limit restriction.
- In factoring, the rates can be changed as you continue to finance more money. In a bank loan, the annual percentage rate is fixed.
Which Factoring Options are Available?
The factoring options available are recourse and non-recourse. Both of them refer to the party that takes on the risk of payment. A recourse agreement means that you are accountable for buying back the invoice from the third party company if the customer does not pay it for any reason.
On the contrary, a non-recourse agreement means that the third party company will take the loss if the customer does not manage to pay the invoice because of financial complications.
Truck Factoring with Non-recourse
This factoring option sounds tempting from a risk analysis angle. Not every factoring company takes on non-recourse accounts. The ones that do not provide non-recourse factoring normally have various preconditions. Non-recourse factoring is more costly compared to recourse factoring.
Additionally, non-recourse factoring is specifically limited to debtors who are possibly going to pay. In case the debtor has a bad credit history, the third party company will not take on the risk of non-payment. Furthermore, non-recourse factoring does not essentially safeguard your company from any risk of non-payment. Most companies give a non-recourse that applies only when a debtor is bankrupt.
Benefits of Truck Factoring with Non-recourse
You will still receive the money you require, even if your customers don’t pay
Non-paying customers are a liability to any business. With non-recourse freight factoring, the factoring firm takes on all the risks associated with non-payment so that you can retain your working capital.
You will constantly know what you are paying for
When it comes to non-recourse factoring there are no hidden costs. The flat price prohibits you from paying extra regardless of duration of time your freight bill stays open. This means that you can easily combine your factoring expenses with your operating financial plan.
You will be able to save money
Many freight factoring companies offer cut-throat industry low rates for the non-recourse factoring. This means that you will have more money on hand without increasing your debt and without restrictions on how to spend the cash.
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