We are continuing with the second part of our “Hiveterminal 101” blog series, which is geared towards the newcomers in our Hiveterminal ecosystem. The blog posts will increase the level of communication from the team and introduce foundational concepts to those who have just recently ventured into the world of invoice financing, whether it is in the role of invoice seller or buyer.
Today, our aim is to explain one of the most important differences in how the recourse and non-recourse invoice financing mechanisms can make a huge difference for invoice sellers and buyers alike.
Let’s set the stage
While we have previously explained the concept of selling the invoice on the Hiveterminal platform, a concrete example is always a good place to start.
Stefan is the owner of Schnürsenkel AG, a small business that provides shoelaces to bigger vendors. One of such vendors is Celine, the CEO of Schuhe AG, a large shoe producer. Celine has recently made a big order with Stefan, with plans to make it a regular monthly occurrence. While he has delivered the order of 100,000 pairs of shoelaces today, he will receive the money — CHF 10,000 — in 90 days’ time. That leaves Stefan in a tough spot, since he will have to fund the production and delivery of 300,000 pairs of shoelaces before he starts seeing the first returns. Needless to say, Stefan has got a liquidity challenge on his hands and turns to invoice financing for help.
With invoice financing, Stefan will be able to sell his invoice immediately, getting, for example, CHF 9,000 and being able to keep up with the demand of Schuhe AG.
“What is recourse?”
Stefan turns to one of the traditional financial institutions for help. Since they provide no online solution, he will have to visit their branch in person, talk to the manager, and deliver a bunch of contracts, forms and financial information from his accounting just to get an offer from them! Not only will it take time, but it also makes him a bit nervous. He has never been through this process before and, frankly, he doesn’t understand the financial terminology, which could have a big impact on the state of his company’s liquidity in a couple of months’ time.
As he receives the offer from the bank, he sees that the manager specifically pointed out that the only option the traditional financial institution is willing to offer at this time is recourse invoice financing. Stefan is baffled. “What is recourse invoice financing?”
Thankfully, the internet is a friend and Stefan quickly finds the information he is looking for on Hiveterminal’s website. Recourse invoice financing/factoring means that if Celine fails to deliver on her promise and doesn’t pay Stefan for his order, or even misses her payment deadline, the traditional banking institution might return the invoice to Stefan and ask for their money back. The same money that would potentially already be spent on making new shoelaces. Yikes. Stefan doesn’t like the additional risk and goes online to look for alternatives.
Non-recourse and the Hiveterminal platform
Stefan asks around and finds out that his friend, Reto, is already using an online invoice financing solution called the Hiveterminal platform. Stefan uploads the invoice that he issued to Schuhe AG and immediately sees the maximum funding amount he could get for his initial invoice. Stefan would get CHF 9,700 for his invoice today, but the non-recourse option that Hiveterminal offers is even more to his liking.
Non-recourse means that the invoice buyer, who buys Stefan’s invoice for CHF 9,700* and is set to receive the CHF 10,000 directly from Schuhe AG in 90 days’ time, also assumes the risk of non-payment. This would allow Stefan to spend less time worrying about the payment and focus primarily on developing his cooperation with Schuhe AG. Sweet!
So, which is better, recourse or non-recourse?
The answer to that question depends on your role in the invoice financing process. While non-recourse invoice financing is a better fit for the invoice seller, the invoice buyer is assuming more risk in purchasing the invoice. In any case, we believe it is an important concept and difference to be understood by all parties involved in the invoice financing process.
The Hiveterminal platform currently only offers the non-recourse buying option, but that is not to say that we will not offer the recourse option for an increased safety of the invoice buyer’s purchasing invoices as we expand our services further within the DACH market.
Stay tuned for more Hiveterminal 101 posts, as well as other important business- and tech-related updates!
* The discount percentage used in the risk profile of an individual can vary, depending on the financial data by both the invoice seller and invoice buyer company. The actual discount is calculated for each specific invoice in real-time at the time of invoice upload.