The Only Non Recourse Financing for Small Businesses
No matter what size business you operate, you will probably require financing at some point in the cycle. One of the biggest fears most lenders often have is that you won’t pay back the loan, so they require collateral from you to ensure payment. What happens if you default on the loan, the collateral is seized and sold, and then there is still money that is owed? Depending on the type of loan you have, the lender may come after your assets or they may have to just take their losses. The difference is whether you have recourse or non recourse financing.
What Is Recourse or Non Recourse Financing?
Recourse financing is when you, as the business owner, are responsible for the entire repayment of the loan. This is the type of loan where the lender will come back to you and take other assets. In non recourse financing, the lender assumes the risk. This does mean that you will pay higher interest rates and have to have better credit, but it mitigates your liability if you cannot pay the loan back. The lender can go after the collateral that you pledged, but once that collateral is seized and applied to the loan, they cannot come after your assets.
How Does This Translate to Factoring?
In factoring, you have sold your invoices to a lender. Recourse factoring is when your business will be responsible for the invoice if your customer does not pay. Non recourse factoring is when the lender assumes the liability if the customer does not pay the invoice. Once again, the terms with non recourse factoring will be different than for recourse factoring. You may pay a bit more interest or have higher fees with non recourse financing, but the long term benefits to your business include peace of mind that you won’t be held financially liable for your customer’s invoice. Non recourse factoring is a much better deal that limits your responsibility. The lender won’t look at the creditworthiness of your business when determining the rates, but at the customer who owes the invoice. This takes the pressure off you, because you may not have the
Read the Fine Print
When looking at factoring as a financing method, make sure to compare the difference between recourse and non recourse factoring. You may have to request non recourse financing, because it does put the liability on the lender. Ask for the comparison so that you can make an informed decision and know that the peace of mind you have is worth the small amount of extra fees. It just makes sense not to put your business at risk during lending.
