Meaning
Asset based financing allows a company to borrow against its accounts receivable while retaining the risk of customer non payment. Under recourse debtor facilities, the lender provides immediate cash for a portion of the invoice value, but the borrowing company must buy back any invoices that the customer fails to pay. This arrangement usually costs less than non recourse funding because the lender does not take on the credit risk of the end customers.
Credit Risk
Liability for unpaid debts remains with the borrower throughout the duration of the funding agreement. In the event of a customer default, the provider of recourse debtor facilities will deduct the missing amount from the next funding advance. This ensures the lender is always protected by the physical assets and the corporate guarantee of the borrower.
Liquidity Source
Working capital is released much faster than the typical thirty or sixty day payment cycle of a commercial customer. Using recourse debtor facilities allows a growing business to pay its own suppliers and employees without waiting for its clients to settle their bills. Cash flow becomes more predictable as it scales directly with the volume of sales generated by the firm.
Collection Duty
Management of the sales ledger and the pursuit of late payments stays with the original seller. The organization using recourse debtor facilities is responsible for ensuring that its customers pay on time to avoid the cost of repurchasing invoices. Professional credit control is required to maintain the value of the collateral and keep the interest rates low.
