Recourse factoring is what most people think of when they hear the word "factoring". This involves a third-party factoring company (either a true third party, or a third-party business also owned by you or friendly owners) lending on a short-term basis for your accounts receivable. Here's how it works:
The $1,200.00 factoring fee would count as an expense towards your business. From an asset protection standpoint, the factoring compay would file what is known as a UCC Financing statement to put a lien on your business's personal property, meaning that if the factoring company isn't paid, then it can foreclose your businesses bank accounts. This is advantageous because it makes your business look like a poor target for litigation, even if you are also owner or part owner of the factoring company.
However, if you use an outside factoring company that you don't control, and if an invoice isn't paid, you'll owe the factoring company the amount of the money advanced, as well as the factoring fee until paid. This is the "recourse" portion of the factoring. Typically, since your business will have numerous invoices outstanding with your factor, the factor will first use your available reserve from all of your theoretically "good" invoices to pay the deficiency, typically after 90 days elapse from invoice date. Once your reserve is exhausted and new invoices remain unpaid, the factor may begin collections against your business.
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Law Office of James Ryland Miller, PLLC
1098 Ann Arbor Rd W #377
Plymouth, MI 48170
Mr. Miller is physically located in Plymouth MI and meets with clients in Arlington TX by appointment only.