Recourse & Non Recourse Factoring
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What is recourse factoring?
Recourse factoring is a form of debt factoring that sees the risk of non-payment remain with the company that raised the invoice.
Like any other form of factoring, the invoice is raised and funds are released within 24 hours by the funder, usually up to 95% of the invoice amount.
Should the customer fail to settle the invoice, the issuing company must absorb the costs and buy back the invoice from their finance provider.
What is non-recourse factoring?
Non-recourse factoring is a type of business finance that sees funds released from an invoice as soon as it is raised, usually within 24 hours. Up to 95% of the invoice amount can be released, although 90% is more common.
The factoring provider then chases the invoice and reimburses the company with the remaining balance (minus any agreed fees and charges) when the invoice is settled.
The key difference with non-recourse factoring is that should the payment be late, or even remain unpaid, the factor takes the hit, with no comeback on the issuing company.
This works similarly to bad debt protection.
What are the advantages and disadvantages of recourse factoring?
The advantages of recourse factoring are:
- It’s cheaper – As the risk of non-payment remains with you, the cost of finance is lower.
- Easier to qualify – As there is recourse for non-payment, the credit checks required to qualify are less stringent.
- High percentage paid – As you retain the risk, you may be able to fund a higher percentage of each invoice.
The disadvantages are:
- Risk of non-payment – You retain the risk of non-payment.
- Potential cash flow impact – Your invoice finance facility is designed to improve cashflow. Paying back up to 90% of the value of an unpaid invoice could have a significant negative cash flow impact.
Keep reading – The advantages and disadvantages of debt factoring.
What are the advantages and disadvantages of non-recourse factoring?
The advantages of non-recourse factoring are:
- It’s very low risk – Once payment is received from your factor, the risk of non-payment is gone.
- No risk of cash flow impact – The impact of having to repay an invoice can be severe and should you be unable to pay, there is the risk of invoice finance. Non-recourse funding avoids this risk.
The disadvantages are:
- The approval process is strict – Your funder will not want to face losses due to non-payment, so they are more likely to reject customers or invoices if they are not comfortable. This can make trading more complex.
- It costs more – If you’re transferring risk to your lender, they will expect to be compensated through higher finance costs.
- Not every non-payment is covered – There could still be circumstances that see you liable to repay funds, so check your terms and conditions carefully.
What are the main differences between recourse and non-recourse factoring?
The main differences between these two products are who takes on the risk of defaulted invoices. Assigning liability between yourself and your factor is the key.
That isn’t the only difference, however, there are also differences around how simple the application process is, how stringent ongoing credit checks are and how much is released as a percentage of each invoice raised.
With non-recourse factoring finance, if an invoice is unpaid or paid late to the factor, it is the factoring company that absorbs the debt.
How do I find the right factoring deal for my business?
The best way to find the right factoring deal for your business is through the ABC Finance invoice finance comparison tool.
Our platform allows you to upload your company details and finance requirements and have lenders compete to offer you the most attractive finance terms.
Once you’ve secured the perfect offer, you simply progress your application in a single click.
Of course, our team of experts are on hand to help you compare offers, make sense of the small print, and we can help manage the process from start to finish.
