• provide cash flow to keep a business viable through its early, rapid growth years;
• reduce the urgency of the situation so a business has the time and maneuverability to consider thoroughly its best long-term financing options;
• allow a business to build a solid relationship with a reputable factor thereby making the business more attractive to traditional finance.

If you have been looking at factoring as a financing option for your company or for one of your clients, then you have probably encountered the terminology of recourse and its variations: Recourse, Non-Recourse, and Modified Non-Recourse. In order to make a well-informed decision about which program is best for a particular business, it's important to understand the recourse option offered and what it means for the business. As you will see, in the context of factoring, recourse can have a profound affect on the risk taken in the event a customer does not pay.

There are two major reasons why a debtor would withhold payment on an invoice (1) there is a trade dispute, or (2) there is a financial inability to pay. In the world of factoring, recourse comes into play when either of these situations occurs.

The industry standard says that invoices involved in trade disputes fall under a recourse structure, or the client is responsible for repayment to the factor. That means if a debtor does not pay because they have an issue with price, quality, quantity, terms or delivery, or if there is a strike or lockout, the factor can, according to their contract, demand that the seller of the invoice buy back that particular invoice.

Who bears the burden if a debtor can't pay? If the debtor's nonpayment is due to their financial inability to pay, like insolvency or bankruptcy, the terms of the factor's program and recourse structure govern how that invoice is handled. There are three prominent recourse structures within the factoring industry, each spreading the risk of nonpayment differently.

The first of such structures is recourse. Factors who have a recourse structure don't take on any credit risk. Their client is held responsible if the reason for nonpayment is due to insolvency or bankruptcy. The invoices are treated just like those in a trade dispute, where the seller of the invoice is bound by contract to buy back the unpaid invoice. It is important to remember this is not an added risk; even if the business had not factored the invoice, it would still be out the amount the debtor owed. But having factored the invoice, the business is additionally responsible for the factor's fee.

In a non-recourse structure, the factor does assume credit risk. Whereby, if a debtor becomes insolvent or files for bankruptcy, the factor assumes the risk, not their client. Factors who offer this type of structure normally acquire credit insurance on each debtor to protect themselves in the case of insolvency. Many businesses find this feature an additional benefit to factoring since the factor effectively provides credit insurance for factored customers.

The final variation is modified non-recourse. In this structure, the factor assumes credit risk only after a certain dollar amount of indebtedness. Before that point, all invoices are considered recourse. For example, a factor may impose a condition whereby they assume credit risk only if an account is indebted by an aggregate of $2,500 or more. Under the same conditions, a account with only $1,500 worth of open, factored invoices, would fall under a recourse structure. The rationale for this stipulation is that before a certain break-even point, the associated costs of acquiring credit insurance actually outweighs the risk for loss.

In deciding which program is right for you or your client, look at the short and long-term needs of the business, and plan for a changing customer base. As with any investment, caveat emptor. If a particular program is offering low risk at a low premium, investigate it thoroughly. Make sure you know what structure the factor is offering before signing any contract.

March Madness in the Office
Beginning this month, office productivity is expected to take a 16-day plunge as workers follow the NCAA basketball tournament. According to estimates, March Madness 2005 will cost U.S. companies close to $890 million in lost work as employees search the internet to find game stats and scores, and even watch live video feeds. How are companies avoiding a potential loss in productivity? In one of two ways, fighting it or joining in.

The market for internet management software picks up 30% during tournament season. Companies that invest in this type of software are able to either limit bandwidth during the tournament or limit the amount of time spent on the estimated 300,000 sports and gambling sites. For companies that don't enforce internet restrictions, implementing an office pool has actually led to more stable productivity. While this might sound contradictory, experts say office pools work when participation and the collection of scores are a company-wide effort. Basically, if the company is keeping track of the results and standings, the employees won't need to. Human resource consultants further back this claim with evidence that businesses with office pools demonstrate higher employee morale and greater employee retention.

Does Hamilton finance businesses with tax issues?
Hamilton finances businesses with preexisting tax issues on a case by case basis. In the past, Hamilton has assisted businesses with their back tax issues by working closely with the IRS to subordinate any tax liens and develop a repayment program.

Why does Hamilton only work with incorporated businesses and not sole proprietorships or partnerships?
Sole proprietorships and partnerships represent a greater risk for Hamilton than do incorporated entities. In a sole proprietorship or partnership, the law does not separate the owner(s) from the business when it comes to debts, liabilities and other obligations. Thus, it would be difficult to mitigate any loss in times of default since any remuneration would be limited to the amount of the owner's personal assets. Secondly, the financial profile of a sole proprietorship or partnership is limited to the credit profile and net worth of the individual owner(s). Finally, sole proprietorships and partnerships tend to have looser accounting controls, which can hinder assessing the accurate financial state of the business.

Hamilton has published an enormously comprehensive and handily sized Pocket Guide to Factoring. The Guide provides information on the various terms and practices common among factoring programs. Its convenient layout allows you to, with the flip of a thumb, sort through the various options available with common sense explanations and definitions. If you would like to receive a copy of this informative Guide, it's FREE. Click below.