Non-Recourse Factoring
Non-recourse factoring is one of two options offered to businesses when seeking invoice factoring solutions. Invoice factoring is where a business may sell all or some of their outstanding invoices to a factoring company, typically to increase monthly cash flow. The payments for the invoices are still made by the customer.
However, they are made directly to the factoring company rather than the business itself. Non-recourse factoring offers businesses the option to factor their invoices without taking on the risk that the customer will not repay the advance. The factor company will assume responsibility for non-payments, therefore taking the loss on that invoice. Alternatively, in recourse factoring, the business owner selling their invoices would be responsible for any portion not paid by their customers.
Non-recourse factoring tends to be less common than recourse factoring, due to the possibility of lower advance rates, higher required monthly minimum fees, and higher factoring fees. Since the factoring company is assuming the risk, if a factoring company does offer this option, they typically require more from your business to be approved.
Non-recourse factoring tends to be offered to businesses that have a good credit history, while recourse factoring can be offered to those with fine or poor credit. Factoring companies will likely want to see that you and your customers have strong credit histories, and a solid track record of timely payments. It is also probable for the companies to have stricter requirements or a more in-depth process for approval. This is because they will take all these aspects into consideration to determine how high or low risk your customers and business are.
What Will Be Covered by Non-Recourse Factoring
If your customer has filed for bankruptcy, closure, or has proven an inability to pay their debts, your business will remain protected, and your agreement is likely to cover you. Furthermore, the more protection you receive from a specific factoring company normally the higher the cost.
What Will Not Be Covered
Each factoring company may have their own set of regulations and conditions regarding the failure of payment. However, a typical non-recourse factoring agreement may not include:
1. The disputation of invoices
2. Invoices that a business sends directly instead of through the factor company
3. Customer refusal to pay (without reason/notice)
4. Customers that claim they did not receive service
5. A business breaches their previous agreement made with the factor company
If any of these issues occur during the payment process, it is possible your business will still be at fault and held responsible.
Payment Collection
Different factoring companies offer different factoring rates, fees, and terms for payment collection. Collection calls are normally made around 40 days after the invoice was sent to the factoring company, and may continue for several weeks.
Non-Recourse vs. Recourse Factoring
| Non-Recourse Factoring | Recourse Factoring | |
| Advance Rate | Lower | Higher |
| Qualifications | Factor companies will likely require good payment/credit history | Factor companies will likely not require, but go over payment/credit history |
| Fees/Rates | Typically, higher | Typically, lower |
| Funding | Fast to fund but may have additional steps | Fast and short process once approved |
Both non-recourse and recourse factoring have their advantages and disadvantages depending on what a certain business is looking for. Moreover, some questions businesses should consider are how trustworthy or creditworthy the client may be, how much – if any, risk can your business handle, and what your business can afford.