Types of Factoring
There are two main types of business: recourse and non-recourse. The differences between recourse and non-recourse factoring services are comparable to the differences between an automobile with full coverage insurance and a vehicle with limited insurance coverage.
Recourse factoring is like having an automobile with limited insurance coverage – if you get into an accident or damage somebody’s property – those charges will come out of your pocket. The tradeoff is that these services are generally much cheaper than obtaining full-coverage insurance. With recourse factoring, if one of your clients defaults on a payment, this money comes out of your own pocket.
With non-recourse factoring, the factor, or insurance company in this analogy, assumes all the risk. When you enter into a non-recourse factoring agreement, the factoring company assumes all financial responsibility for unpaid invoices. While this is a nice advantage to have, just as full-coverage auto insurance is more expensive than basic car insurance, you should expect to pay a lot more money for non-recourse factoring services.
Types of billing
Depending on your industry and your business’ setup, you will generally invoice your clients in one of two ways: with progressive billing or non-progressive billing.
Non-progressive billing is the act of invoicing your clients one time for one-time goods or services. This method is less expensive when it comes to securing the services of a factoring company. Companies that collect in installments or require ongoing payments for goods or services use progressive billing. Because progressive billing generally requires more effort and ongoing contact between your client and the factoring company, using a factoring service for accounts that require ongoing payments will require higher fees than the aforementioned group.