Venture factoring structures come in various forms. Factoring firms can buy the accounts receivables with or without recourse. Under a factoring structure with recourse the company guarantees the payment of the receivables until maturity.
This reduces the risk to the factoring firms and lowers the discount rate at which receivables are bought. This makes raising cash less expensive. Under a nonrecourse structure the company transfers the title of its accounts receivable to the factoring firm.
Generally factoring firms take the responsibility for collecting the accounts receivables directly from the company’s debtors. This so-called notification factoring can have a negative impact on the company’s customer relationships. The transparency is avoided in non-notification factoring where the customer keeps paying to the company that in turn passes on the payment to the factoring firm.
Depending on the volume and the period of credit, factoring firms can charge a factoring service fee as well as an interest on the amount funded. Combining these costs with the discount rates at which the receivables are financed, venture factoring becomes more expensive than traditional sources of financing.