Recourse vs. Non-Recourse Factoring

Although factoring financing programs can vary, they generally offer one of two types of factoring programs: full recourse or non-recourse. This article describes the differences between the two programs.

The basics

Most factoring transactions are structured so that the factor purchases the invoice from the client. The purchase usually happens in two installments: the advance and the rebate. The transaction ends when the client pays in full, at which time all accounts are settled. For more information, read “What is factoring?” and “How does factoring work?“.

In a commercial sale, the purchaser sometimes has the option to return product that does not meet their quality requirements. Factors that purchase invoices often have the same option to return invoices that don’t meet their requirements. Recourse – whether full recourse or non-recourse – determines if and when the factor can return the invoice to the client and demand to be made whole.

Full recourse factoring

Full recourse factoring is the most common type of invoice factoring. In full recourse factoring, your company remains liable if an invoice is not paid by a customer for any reason, whether it be quality problems, financial problems, or even if they simply don’t want to pay. If an invoice is not paid, you will have to either provide the factoring company a new invoice, allow them to debit reserves, or simply paying them back.

Non-recourse factoring 

This type of factoring is less common and it’s usually misunderstood. A non-recourse factoring plan works exactly the same as a full recourse plan, with the exception that you do not have to pay back the factoring company if an invoice is not paid due to an insolvency of the customer during the factoring period.

This exception is often misunderstood, as many business owners mistakenly assume that non-recourse factoring eliminates any responsibilities for payment if a customer doesn’t pay. In many cases, this is not true.

For the non-recourse component to become effective, the reason for the non-payment has to be insolvency — usually a declared insolvency such as bankruptcy or closure. And, more importantly, the insolvency must occur during that factoring period usually defined as the first 90 days (this varies) from the time that the factoring company bought the invoice.

As you can see, non-recourse factoring offers a very narrow protection. While it’s good protection, it’s not as comprehensive as many people think. Since many companies offer their own version of non-recourse factoring, always examine contracts with a competent attorney to make sure that you understand exactly what are you getting.

Which type of invoice factoring is better?

One common question is, “Which type of invoice factoring is better?” This matter is subject to much debate in the industry. The reality is that every factor spends considerable resources determining the creditworthiness of the invoices they purchase.

You can expect factors to be prudent when purchasing any invoice, so the likelihood of them buying an invoice that will default is usually very slim – but it does happen. Ultimately, it’s up to you as a business owner to determine if paying a premium for non-recourse factoring is worth it.

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We can provide competitive terms for recourse and non-recourse factoring plans. For information, get an online quote or call (877) 300 3258.