Many companies factor receivables — that is, sell their unpaid accounts receivable accounts to a third party — in order to generate cash flow. Non-recourse factoring ensures the third party cannot require the selling company to reimburse the factoring company for losses from uncollectable accounts. To achieve non-recourse factoring, businesses should negotiate contracts with the factoring company, avoid selling old receivables accounts, and promote strict credit risk management of customers. Each of these factors requires more work on the front end of this process prior to actually factoring receivables.
Factoring receivables is a way many companies gain cash flow without having to wait on fully collecting their open accounts receivable. Non-recourse factoring typically results in a company receiving 70 to 90 percent of its sold receivables in cash up front by the factoring company. Some factoring companies may pay an additional percentage, such as 5 to 20 percent, once the entire balance of receivables is collected. While the seller will pay a small fee for this service, it does provide cash flow for immediate needs.
Negotiating a contract for non-recourse factoring is a must. Sellers can dictate the dollar amount sold, pay out percentages, types of receivables available for sale and other terms or conditions relating to the sale. Companies can also send out their terms to multiple factoring companies to find the best partner for this activity. Additionally, some factoring companies may have more lax rules on the type of receivables they accept, providing sellers to factor more receivables in order to improve cash flow.
Most factoring companies avoid extremely old receivables or those with customers having poor payment histories. For example, companies may not factor receivables over 90 days old or with customers having missed two or more payments. This protects the factoring companies from taking on receivables that will not result in payment from customers. Factoring companies are not necessarily collection agencies; they desire to turn the receivables into cash as quickly as possible. Companies who do engage in the factoring of older receivables will typically have lower payouts than receivables in good standing.
Non-recourse factoring companies may only accept receivables that follow certain credit rules or policies. This ensures that all receivables factored will be collectable and that losses will be at a minimum. Factoring companies making these restrictions will usually lead businesses to adopt or alter new credit policies. These policies will apply to all customers or be grouped by credit score. Businesses can then separate each accounts receivable balance and submit them to the proper factoring companies.