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Bad Debt

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Understanding Bad Debt

In the business world, bad debt refers to accounts receivable that a company is unable to collect from its customers. This could be due to a customer’s inability to pay due to financial hardship, bankruptcy, or even fraud. When a company can’t collect on an account receivable, it usually writes it off as a bad debt expense.

Bad Debt as it Relates to Invoice Factoring

Invoice factoring is an effective way to manage bad debt risk. Since factoring companies assess the creditworthiness of a business’s clients before purchasing the invoices, they can help businesses avoid dealing with clients who have poor credit histories or are unlikely to pay their invoices on time.

Recourse Factoring

Recourse factoring is a common type of factoring service where the business assumes the risk of non-payment by the customer. If the customer does not pay the invoice, the business is responsible for repaying the factoring company. This type of factoring typically offers lower fees since the factoring company has less risk.

Non-Recourse Factoring

Non-recourse factoring is a type of factoring where the factoring company assumes the risk of non-payment by the customer. If the customer does not pay the invoice, the factoring company cannot seek repayment from the business. This type of factoring typically has higher fees due to the increased risk to the factoring company.

Non-recourse factoring can be an attractive option for businesses with customers who have questionable creditworthiness. It offers businesses the peace of mind that they will not be held responsible for their customers’ non-payment.

The Bottom Line

Factoring can help businesses manage their credit risk. Factoring companies often provide credit checks on customers, helping businesses avoid doing business with customers who are unlikely to pay their invoices. This can help businesses reduce their bad debt and improve their bottom line.

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