Article About The Benefits Of Non Recourse Factoring & Invoice Discounting (Bad Debt Protection)
Some but not all factoring companies (factors) are able to offer non recourse facility options. This may be in conjunction with either a factoring (factor collects the sales ledger) or an invoice discounting (the client collects the sales ledger) facility.
The normal method of operation is that the client will apply to the factor for a non recourse credit limit in respect of any new customer that the client intends to sell to. The factoring company will research the customer and decide upon a non-recourse credit limit. The credit limit normally represents the level of invoicing which the factor will cover.
Non Recourse Factoring
A covered invoice is normally one that if not paid for reasons of the customers insolvency (or in some cases protracted default), the factor will pay the balance of the invoice to their client. The client may also be subject to some kind of first loss clause which may reduce the value of the payout.
The benefit that non recourse provides is the protection against bad debts that it affords the client. Providing the client trades within the value of the credit limits provided by the factor, they know they are protected against failure (check the terms of the agreement though for the exact circumstances). There is however a cost consideration. Non recourse will normally be more expensive than recourse but our advisers are aware of the various factors that are offering low cost non recourse at any time.
One further consideration is the quality and spread of the customers that the client company deals with. If they are all blue chip companies or government departments the client may decide that they will receive little benefit from non recourse. Also, if your sales ledger is extremely well spread such that you only have very small amounts owed by any one debtor you may argue that non recourse bad debt protection is not necessary.
On balance though, if the failure of a major debtor could seriously affect your business you would be well advised to consider the non recourse option which could provide significant peace of mind.
For more information about choosing a factoring company follow this link. Our advisers are available to give you more information and advice about non recourse and bad debt protection.
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For further information about Factoring follow this link
For further information about Invoice Discounting follow this link
