Types of FactoringThere are two types of factoring products available: recourse and non-recourse. The difference comes down to the amount of risk all parties are willing to assume, and the premium required to assume the risk of non-payment on an invoice. With recourse factoring, your business remains liable for non-payment by your customer, and with non-recourse, the factor assumes all the risk of customer non-payment. In doing so, the non-recourse factor will charge a higher premium for his factoring services. Other types of factoring - A business can either sell its invoices on a “notification” basis or “self-collect” basis. There are substantial differences between the two. Notification basis signifies that the factoring company that purchases your business’ invoices also collects on them. In other words, it is much like outsourcing your invoice collection process. When your company receives the advance from the factor, it washes its hands of the collection process and the factor takes over all the “nug work” of collecting the payments. The second type of factoring is called self-collect. The difference is when it's a notification sale, your clients will pay the factoring company directly. With the self collect method, you collect the invoice debts yourself and then forward the payments to the factoring company. In selling your invoices in this way, your customers will never know that you sold their invoices to the factoring company. It is easier to sell invoices on a notification basis because the factoring company knows that it will get its money back in a timely fashion. Additionally, the main advantage to a business in selling invoices on a notification basis is that the factor, or invoice discounting company, is then responsible for collecting the debt, as well as assuming all the credit risks. Therefore, using factoring on a regular basis to fund your company’s cash flow can eliminate the need for staffing a credit and collections department. This equates to a great deal of savings for your business. Which method will you use? That will depend upon the terms you work out with the company purchasing your invoices. In most instances, most factors will insist upon using the notification method. This method provides them the greatest, safest possibility of recouping their investment. Hard as it may seem to believe, some companies using the self collect method may not accurately report the collections they make from their clients. This effectively denies the factor the ability to recoup their investment. In other words, not reporting collections made is a form of stealing. Therefore, most modern factors have shied away from using the self-collect method. They opt instead to collect invoice payments themselves, i.e., use the notification method.
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