What is Recourse Factoring?

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:

1. Your business generates a $20,000.00 invoice that you know will be paid in about 60 days.
2. You need cash now or you wish to asset protect the invoice.
3. You send the invoice and any supporting paperwork to the factor.
4. Within 24-72 hours the factor lends a percentage of the invoice, usually 80%, holding 20% in reserve. So you receive $16,000.00 within a few days of sending the invoice.
5. The factor charges a factoring fee of approximately 0.1% per day (3% per 30 days or 6% per 60 days). Since we'll be paid in 60 days, our factoring fee will be 6% times $20,000.00 = $1,200.00.
6. At day 60, the client pays the factoring company the invoice, and the factoring company pays the remaining 20% reserve to your business, less the $1,200.00 factoring fee.
7. This means you collected $16,000.00 in 3 days or less, and an additional $2,800 in 60 days.

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.