There are different types of invoice financing. One is invoice factoring, which will be discussed in the next section. You may also want to consider single (or selective) invoice financing. In this case, you will only choose to finance certain invoices and treat others as normal. For example, you may want to do this if you need to generate additional working capital for a short amount of time and just want quick access to money. You can send one or several larger invoices to the financing company, which is generally cheaper than having to finance all of your invoices with the associated fees and interest costs.
You should also know the difference between recourse and non-recourse financing. With recourse financing, your company must agree to take full responsibility for the payment of the invoice that you borrowed against. So, if your customer defaults and you can't get them to pay, you will need to reimburse the advanced amount to the lender. The lender may then retain the remaining value of the invoice until the customer pays before deducting the management fee and interest and transferring the rest to you.
With non-recourse financing, the invoice finance provider will have to “eat” the losses. Clearly, this is a lot riskier for the lender, and you can expect it to be much more expensive in terms of fees and interest rates. Also, the lender may impose strict limitations, so you must read the terms and conditions carefully before proceeding. This type of agreement is relatively rare due to the increased risk for the lender.
