Recourse vs. Non Recourse Factoring

What happens if my customer refuses or is unable to pay an invoice that I have sold to my Factor?

The answer to this question depends on what type of factoring agreement you have in place with your Factor. The two main types are Recourse and Non Recourse factoring. Most factoring companies will only do one or the other. Some factors now offer a hybrid agreement called Modified Recourse factoring.

Recourse Factoring

In the event that a Debtor does not pay the invoice, recourse factoring allows the Factor to come back to the Seller for payment. The risk of insolvency does not transfer to the Factor when an invoice is purchased. If a customer refuses or is unable to pay the invoice (due to bankruptcy), you (the Seller) must buy back the unpaid invoice or exchange it with another receivable of equal or greater value. Since Recourse Factoring offers the least amount of risk to the Factor, this factoring agreement offers the lowest fees.

Modified Recourse Factoring

With modified recourse factoring the Factor carries receivables/credit insurance and offers protection to the Seller if the customer is unable to pay the invoice due to financial failure or bankruptcy. However, if the customer refuses to pay the invoice from a dispute over quality, delivery, or specifications, the Factor has recourse back to the Sellers other receivables.

Non Recourse Factoring

With Non Recourse factoring the risk of insolvency and non-payment is completely transferred to the Factoring company. If the customer goes bankrupt or refuses to pay the invoice (for whatever reason), the Factor cannot come back to the Seller for payment. This method of factoring is more convenient and worry free for the seller and carries more risk for the factoring company. Therefore factoring fees for Non Recourse factoring are a little higher than fees for Recourse factoring.

Which method is better?

As the seller of the invoice, if you are comfortable with the risk, recourse factoring is better due to the lower factoring fees incured (a lower discount rate). Non Recourse factoring is favorable when minimal risk is more important than higher factoring fees, such as with larger invoices or customers who's financial status is unknown or questionable.

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