Recourse factoring is a type of invoice factoring wherein the client agrees to buyback/exchange/or pay back amounts advanced from factored invoices in case of non-payment after a period of time (referred to as the recourse period). In layman’s terms, a recourse factoring program is one where the client agrees to be ultimately responsible for the invoice if a client’s customer does not pay within the recourse period.
Even people who are familiar with factoring might not know that there are, in fact, two different types of factoring – recourse and non-recourse.
The differences between these factoring programs are large, and so it is important to know what they are and what makes them different from each other in order to give your business the knowledge it needs to make a good factoring decision.
Generally speaking, recourse factoring is far cheaper than non-recourse factoring. A large part of a factor’s fee is determined by associated risk of collection. Since the client is responsible for the invoice in case of non-payment, the risk to the factor is less, and thus the rates are cheaper. Recourse factoring programs also have more flexible terms, since the client is taking on more of the payment risk. This can allow clients to factor “riskier” customers and industries than would normally be allowed under a non-recourse scenario.
Obviously, the biggest downside of recourse factoring is that your business would be responsible to pay back or exchange bad invoices when they aged older than the recourse period. This obviously puts the onus on a business to work with solid customers who pay and pay on time.
Non-Recourse factoring is a type of invoice factoring wherein the factoring company agrees to take on the risk of nonpayment from a client’s customer. Unlike recourse factoring, a factoring client would not be required to exchange or repurchase invoices in the case of non-payment by customer.
The biggest benefit of non-recourse factoring is that the factoring company does not require you to buy back or exchange bad invoices in case of non-payment by your customers. This allows a business to know that once they have factored an invoice they will not be responsible for it if it is not paid.
Since the factoring company is taking additional risk of non-payment on invoices, non-recourse factoring is more expensive than recourse factoring. Additionally, terms can be less flexible and there may be additional restrictions on the types of customers that are allowed to be factored under a non-recourse program. Also, due to the additional risks to the factoring company, certain industries may be ineligible to be factored under a non-recourse program.
Non-Recourse terms vary between factoring companies, but generally non-recourse does not cover all situations. For example, if issues of non-payment or short payment arise out of negligence or fraud from the factoring client, in those cases the client would still be responsible for the repayment or exchange of that invoice. Only when non-payment is solely due to the insolvency, negligence, or fraud of the customer is an invoice considered eligible for non-recourse.