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Different Types of Factoring

When you’re running a business, it can be challenging to keep sufficient cashflow to pay ongoing expenses. This is especially the case when you’re dealing with seasonal fluctuations. A factoring service in Milwaukee, WI, can help provide the necessary funding without increasing the company’s debt load. And while factoring can make a big difference to your business, you must understand the different types that are available so you can choose the one that’s right for your situation.

Recourse vs. Nonrecourse

When you’re setting up a factoring arrangement, you have the option to choose between recourse and nonrecourse factoring. Recourse factoring means you are responsible for the credit risk for the invoice. While you can get cash now for one or all of your receivables, the factoring company will look for either repayment or expect replacement invoices if your customer doesn’t pay those invoices down the road.

On the other hand, nonrecourse factoring has fewer risks involved for you. If your customer doesn’t pay, then it doesn’t affect you. The factoring company takes all the risk in this case. Naturally, they’ll want to get compensated for the possibility of default, which is why you’ll be paying more money for this type of financing and it’s only available for certain industry sectors such as transportation and apparel.

Advance vs. Maturing

With advance factoring, you’re selling your right to collect payment on an invoice in exchange for money now. Advance factoring is a great way to streamline your cash flow and help you bridge the gap that a net-30 or net-90 payment term leaves you with. Smaller companies don’t always have enough cash reserves to keep the business afloat until their customers pay them, which is why advance factoring makes the most sense for them.

On the other hand, you can wait to get paid until the invoice becomes due. That’s called maturing factoring. In that situation, you’re still outsourcing the hassle of collecting on these outstanding receivables yourself, but you’re getting paid later. Nevertheless, your company can get by with less staff in the accounts receivable department, which can still be worth it to your business.

Domestic vs. Export Factoring

If you’re selling goods or services to other domestic businesses, you don’t have to worry about this distinction. However, if you’re exporting goods, you may want to take advantage of export factoring. The concept of factoring is still the same. However, there are more parties involved because the factoring happens on both the import and the export side.

With export factoring, there is also the option to use the process of forfaiting. This involves giving up all rights on the receivables in exchange for getting payment now. In contrast, regular export factoring often involves maintaining a credit insurance policy and undertaking some of the general account duties associated with managing your accounts receivable.