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Recourse factoring is a cash flow method where companies sell their uncollected accounts receivable balances to a third party. The recourse portion means that the seller is liable for any uncollected balances by the third party. Tips for recourse factoring include adopting stronger credit practices when reviewing customers, negotiating specific terms regarding the factoring process, selling only receivables accounts with high collection possibility, and using multiple third-party factoring companies.
Selling goods and services on credit means companies will most often require customers to fill out a credit application. This provides the seller with information on their past credit history and performance with other suppliers whom have extended credit. Sellers use this information to determine the available credit limit, terms or rewards for early payment, collection cycle and other specifics. If the seller desires to factor receivables at any point in the future, they will probably need to provide this information to the factoring company. Recourse factoring can have more restrictions on the type of accounts purchased by the factor company. Companies who always attempt to factor receivables accounts with a poor collection history may pay higher fees or receive less money from the factoring company for these accounts.
Factoring receivables typically mans that a company will receive a certain percentage of the total value factored up front. For example, selling accounts receivable worth $100,000 US Dollars (USD) may earn the seller 70 percent of the value at the time of sale, with an additional 15 percent received once the entire receivables balance is collected by the factoring company. This results in payments of $70,000 USD and $15,000 USD made to the seller, with the remaining money acting kept by the factoring company as its fee. Sellers should negotiate higher initial payouts or lower fees to avoid penalties associated with recourse factoring.
Selling accounts receivable balances in good standing is one way to avoid penalties through recourse factoring. Penalties can include a fixed fee plus repayment of the uncollected accounts in full. Good accounts include those attached to clients who always pay their bills and may even take discounts offered. Factoring companies prefer these accounts, as they represent a more sound investment than other accounts.
Using multiple recourse companies can also help mitigate fees or penalties from recourse factoring. Sellers who factor receivables to multiple third parties can ensure that one company does not continue to receive poor receivables accounts, which can result in more losses than normal for the factoring company. Spreading losses among several companies will usually result in similar fees among each factoring company, limiting the increase in fees or penalties.
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