There are many types of factoring for food and beverage companies, and sometimes it can get confusing. That’s because not every factoring company offers the same types of services, and sometimes they don’t differentiate between invoice factoring and invoice discounting.
The best way to go about procuring factoring services is to make sure that you and the factor have a very clear agreement. Now if you want to be protected from the risk of not being paid by a grocery store for your food and beverage products, you may want to search for non-recourse factoring. In this version of factoring, the factoring company assumes most of the risk.
When a Grocery Store Goes Bankrupt
To illustrate, let’s take a typical example. You have an invoice that’s worth $100,000, which the grocery store is required to pay in full in 90 days. With the factoring agreement, the factor gives you 70% (this may vary depending on the factor) right away. So that means you have $70K as working capital, which you can use to pay your employees’ salaries and overhead. When the grocery store pays the full amount, you then get the rest of the money, minus a standard fee and a percentage for the factor.
But with non-recourse factoring, if the grocery store declares bankruptcy before the due date of the invoice, you get to keep the $70K. You may not get the rest of the money owed you, but basic math tells you that it’s better to lose $30,000 than lose $100,000.
Points to Consider
Usually, non-recourse factoring costs a lot more than recourse factoring. You may receive a smaller advance, and the fees and percentage for the factor may be higher. This is understandable because the factor will want to be compensated for the added risk. In addition, the background checking for that particular grocery store may be more extensive, which means there’s more work that must be paid for.
You may also want to remember that you will only be protected if the grocery store goes bankrupt. If the grocery store refuses to pay because of a dispute with you, then that remains your problem.
So is non-recourse factoring for food and beverage companies worth the additional expense? It’s hard to say, but that can apply to anything in business. Everything in business, when you think about it, is a gamble. You’re simply paying more so that you minimize your risk when it comes to a particular invoice. Moreover, you can’t really know for sure that a grocery store is unlikely to go bankrupt just because it is already well-established. According to some statistics, grocery stores rank as the third type of business that’s most likely to fail after the fifth year, with eating places (which may also be your clients) trailing at number 4. By passing on the risk to the factoring company, you can still get the majority of money owed to you even if your clients go bankrupt.