Broadly speaking, debt factoring refers to the sale of unpaid invoices to a third party at a discounted rate in exchange for instant cash.
Debt factoring and invoice factoring are two terms that are used interchangeably. There are different three types of debt factoring available, more specifically, recourse factoring, non-recourse factoring, and undisclosed or confidential factoring.
If a business has agreed to recourse factoring, they become liable for any unpaid invoices that the factoring company could not collect payment for. In this instance, businesses must pay back the cash advance in full.
Non-recourse factoring is when the factoring company takes liability for the unpaid invoices that they could not collect payment for. However, non-recourse factoring is a more expensive and, therefore, a less common type of debt factoring.
Undisclosed, or confidential factoring, is the halfway point for businesses whose balance sheets aren’t strong enough to secure invoice discounting services. The company benefits from factoring services in a more discreet way as the debtor is unaware of the involvement of a third party.