Non-recourse factoring is a highly sought-after option when you’re considering a brand new invoice factoring partner. Because this form of factoring can help you save money if your customers don’t pay their invoices, it may sound like a good deal.
Unfortunately, there are many misconceptions relating to this kind of factoring, and some factoring information mill not entirely invested in clearing these misconceptions. To make sure you’re obtaining the best arrangement for the business, you should know the advantages and limitations of non-recourse factoring.
So what's non-recourse factoring? So how exactly does it differ from recourse factoring? And it is non-recourse factoring right for your company? Keep reading to find out!
Invoice Factoring Basics
At its core, factoring invoices is easy. A business sells its invoices to factoring companies (also known as factors) for a cheap price in exchange for immediate cash. This enables the business to operate normally without worrying about how exactly long a customer takes to pay.
Numerous businesses in the B2B sector utilize factoring. Industries that frequently use factoring include transportation, government contractors, staffing companies, advertisers and media companies, and pretty much every other business that invoices customers.
Put plainly, lots of merchants employ factoring to lessen their financials. If income problems impact your company operations because your clients place their sweet time paying invoices, factoring might be a choice worth looking at.
How Recourse Factoring Works
In this instance, recourse means “the right to demand compensation or payment.” In the case of invoice factoring, a recourse agreement implies that you're responsible for repurchasing the invoice if your customer doesn't pay for any reason.
A good invoice factor will not leave you high and dry, though. After all, the main purpose of factoring invoices would be to solve income problems, and absolutely nothing kills your money flow like unexpectedly having to repurchase a poor invoice.
Here are some common ways merchants can select in the cost:
- Replace the unpaid invoice with a decent invoice of similar value
- Pay while using reserve (the percentage of each and every invoice that is withheld for fees)
- Pay in installments
Recourse factoring is easily the most common type of factoring invoices available nowadays. However, it’s simple enough to locate an invoice factor that uses non-recourse services in some form or any other.
How Non-Recourse Factoring Works
As you might expect, non-recourse factoring implies that your invoice factor cannot take recourse in case your customer doesn’t pay. In other words, the invoice factor needs to absorb the loss for invoices left unpaid.
In the past, invoice factoring was completely non-recourse. The invoice factor always had to absorb the loss for just about any unpaid invoices (except disputed invoices). However, these days, invoices covered under non-recourse aren't quite so cut and dry.
To differentiate the new method from traditional non-recourse factoring, some companies refer to it as “modified non-recourse factoring.” Whatever the terminology, almost every component that offers non-recourse services is talking about this kind of service: non-recourse factoring through credit protection.
In short, you don't have to repurchase the invoice in case your customer declares bankruptcy.
On the other hand, the factor will not cover the lost capital that is a result of disputed invoices. In case your customer does not believe that you fulfilled the order and won't pay, you will be held responsible.
Invoices which are unpaid or paid late due to forgetful, disorganized, or slow-moving customers are typically not covered under non-recourse factoring too. However, a good invoice factor works along with you or perhaps your customer to solve the problem before charging the invoice back to you. Additionally, finding an invoice factor that takes on collection services for the business can mitigate the risk of slow or late payments.
Although non-recourse factoring offers benefits in case of non-payment, there are some drawbacks for this service. Because of the additional risk to the factoring company, non-recourse tends to be more expensive than its recourse counterpart. Additionally, a non-recourse factor might not be willing to purchase invoices for customers they cannot get credit protection on.
Which Is Better For Your Business?
While non-recourse factoring seems like a good thing, that isn’t always the case. This is especially true because non-recourse options usually cost more and also have limited application.
You should choose non-recourse factoring when:
- The upfront fees are worth paying for as you have clients that may dissolve their assets
- You won’t be able to bear the costs if a client dissolves
You should select recourse factoring when:
- You can’t afford the upfront fees
- It’s unlikely your clients will dissolve
- You’ll be able to bear the costs if your client does dissolve
Final Thoughts
Non-recourse factoring may offer you more protection. However, because the definition is changeable, it’s crucial to understand what is and is not covered under a “non-recourse” agreement before settling on an issue. In addition, non-recourse factoring isn't worth the initial fees.
So while non-recourse factoring sounds snazzy right off the bat, it may seem cheaper to go the standard recourse route. Ultimately, it’s perhaps most significant to locate a component that adequately communicates along with you in case of non-payment, so that you can solve problems before they become urgent.
Ready to locate a bill factoring partner for your business? has an entire slew of ways to locate your factoring partner. Take a peek at our full list of reviews to determine what ones have non-recourse agreements and which of them don’t. You may also check out the comparison in our favorite factors.
