Non-Recourse Factoring Explained

There are two types of factoring financing: recourse factoring and non-recourse factoring. Note that the definition of “non-recourse factoring” varies by company. However, this article helps you understand the product better to determine if it’s the right solution for your company.

What is non-recourse factoring?

Unfortunately, non-recourse factoring is one of the most misunderstood subjects in the industry. As a result, prospective clients tend to have the wrong expectation about this product.

Most factoring companies (though not all) define non-recourse factoring along the lines of:

Non-recourse factoring is a type factoring facility in which the factoring company assumes the risk of non-payment if the customer does not pay the invoice due to an insolvency during the factoring period.

As you can see, this is a very narrow definition. Let’s start by looking at the time frame. The insolvency must happen during the factoring period, which is the 90 day period that starts when the factor purchases the invoice. If the insolvency happens after those 90 days, your company will usually not have the credit protection.

Also, most factoring contracts define the term “insolvency” as a declared bankruptcy. This definition is very important, because a company could be unable to pay invoices without declaring bankruptcy.

There are factoring companies that offer more flexible non-recourse plans. Some go as far as assuming the risk of non-payment for ant credit event, bankruptcy or not. If you are looking for a non-recourse plan, be sure to understand how each factor offers their plans.

How does it work?

In most factoring transactions, the invoice is purchase in two installments. The first installment – called the advance – covers about 85% of the invoice and is deposited to your account once the invoice is factored. The second installment, often called the rebate, covers the remaining 20%, less the finance fee. This settles a transaction.

Non-recourse factoring only offers payment protection for the advance portion of the transaction. If the invoice defaults, you do not have to return the advance to the factoring company. You get to keep the funds while the factor absorbs the loss. However, since the invoice is never paid by the customer, the second installment is never provided. This last point is key in understanding how this solution works (learn more).

No protection against client disputes

A non-recourse program does not offer any protection whatsoever against product or service disputes, late payments or payment disputes. For example, a non-recourse plan would not protect you if your customer:

  1. Is unhappy with the quality of your product/work and withholds payment
  2. Delays a payment or changes payment terms
  3. Disputes the amount of the invoice and short pays
  4. Decides not to pay you (other than due to insolvency or credit issues)

Why is non-recourse factoring useful?

A non-recourse plan is useful because it helps limit your bad debt in two ways. The obvious way is that you will not be liable for the advance if a factored invoice defaults.

However, it limits you exposure to bad debt by helping you determine if you should offer terms to certain customers. The factor can do an exhaustive credit review and provide guidance on whether a customer is likely to pay on time or default. Customers that don’t have good credit can be asked to pay in advance or through a secure method.

For more information, learn more about the advantages and disadvantages of non-recourse factoring.

Get more information

We are a leading factoring company and can provide you with a non recourse factoring quote with high advances and low rates. For more information, please call (877) 300 3258.