There are two general types of factoring, they are:
- Recourse Factoring is the most common and most affordable. With recourse factoring, the factoring company will fund the invoices you submit, but will require a refund plus their fees for invoices that aren’t paid within a specific period of time. You get a better rate with recourse factoring because you assume most of the risk.
- Non-recourse Factoring frees your company of any responsibility for non-paying accounts. This is the more expensive option because the factor takes on more work and more risk. The factoring provider in a non-recourse situation will typically have more stringent policies for the invoices they will accept.
There are also factors that will provide a mix of the two. These factors will assume the risk of your invoices but require you to swap in a replacement of equal or greater value for slow-paying or defaulted accounts.
Factoring companies are not collection agencies and won’t chase your clients for payment. If there is a dispute or failure to pay, the factor will usually put the customer in touch with you before taking any action.
While factoring for most industries is essentially the same, the situation in the medical and construction industries is considerably more complex. Companies that concentrate on medical and construction factoring work exclusively in those industries. They have specific skill sets to deal with the complex billing issues involved. Because these industries are riskier to factor and because of the specialized skills involved, you can expect a smaller advance with a larger fee. There usally two typical situations in term with factoring in these specific fields:
- Billing process: Depending on the type of invoice you factor, you may be billed differently. Most factoring covers standard invoices that require payment for time and materials or goods and services provided. This is known as non-progress billing.
- Progress billing: On the other hand, refers to ongoing projects that get billed in monthly or quarterly increments. This helps a construction company, for example, make payroll or order supplies while finishing up a project. Since progress billing can require more work and maintenance for the factor, it’s typically the costlier option.
Many businesses turn to factoring instead of business loans because it’s easier to qualify and quicker to get funded. Factors typically charge fees based on 30-day increments, so businesses that need funding with flexible payment options over longer periods of time might benefit more from a business loan.
Another type of business financing is accounts receivable financing. This is similar to factoring in that your invoices are used as collateral for a short-term loan. However, unlike a factor, you are responsible for collecting from your clients. This could keep your discount rate lower, but requires more work on your end.
You may want to read the following sub-topics too:
A basic explaination about receivable factoring.
Learn what advantages and disadvantages of factoring are.
A basic explaination about common fees of factoring, how it is structured, explained with case example for easier understanding.
Basic knowledge about funding process of a factoring.
A considerable guidance on how to choose a right factoring company to meet your need.
Additional worth consider tips for factoring buyer.
Jargons commonly used in factoring world.