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What is factoring without recourse?

Factoring without recourse means that the risk of accounts receivable being uncollectible transfers from the buyer to the seller. Basically, if an accounts receivable cannot be collected, the seller does not have to reimburse the buyer like they would if the factoring was “with recourse”.

To account for this risk, the factor (buyer) would likely be able to obtain the rights to the receivables at a lower price than if the factor was with recourse.

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  • What is factoring with recourse?

    Factoring with recourse means that the factor can require the seller of the receivables to reimburse the factor for any receivables that were uncollectible. Basically, the risk of uncollectibility remains with the seller and does not transfer to the buyer. While the factor (buyer) would prefer with recourse, it may require a higher payment to obtain the receivables.

  • What does it mean to factor receivables?

    When a company factors their receivables, it means they are “selling” the receivables to a 3rd party collection company in exchange for cash. The 3rd party collection company will then attempt to collect the receivables. The company would pay a transaction fee, which is typically a % of receivables. Companies can factor with recourse or factor without resource.

  • What is the journal entry to record when a company factors its receivables?

    Since the company receives cash from the 3rd party collection company, the debit would be to cash. Additionally, there would be a debit to factor expense, which is calculated using the % of total receivables. There would be a credit to accounts receivable for the full amount transferred. It is typical for the 3rd party collection company to hold back a portion of the cash until a later date, so that amount would be a plug would be a debit to factor receivable.