Recourse vs Nonrecourse
By now, you understand that accounts receivable factoring is the financial transaction whereby a company sells its accounts receivable invoices to a factor for a discount in exchange for immediate cash, providing the business with instant working capital. Again, when factoring invoices, the qualification relies mostly with your customer’s credit worthiness. Invoice factoring is not a loan, and there are no monthly payments.
The type of invoice factoring you use is very important. There are two types of invoice factoring. There is recourse factoring and non-recourse factoring.
Recourse invoice factoring means that after an agreed amount of time (typically 60, 75 or 90 days), if your customer doesn’t pay their invoice, you will be responsible to buy your invoice back from the factor. Usually the factor will take the recourse invoice and offset it against other credit worthy invoices, if you regularly submit invoices for funding, otherwise you will be asked to pay it back. The cost of recourse factoring is typically lower and more desirable than non-recourse factoring because the factor is not assuming the risk.
Non-recourse invoice factoring is usually defined in two different ways. The typical non-recourse definition for most factoring companies means that you will have no further liability related to the factored invoice based on the insolvency of your customer. That means, if your customer doesn’t pay the invoice due to insolvency (bankruptcy) during the agreed amount of time (typically 60, 75 or 90 days), then you do not have to pay back the advance you received. If your customer doesn’t pay the invoice because it is a disputed transaction, then you will be asked to buy back the invoice even with non-recourse factoring.
The second definition of non-recourse factoring is where the factor assumes the entire credit risk. Should your customer not pay due to ANY “credit” reason (they do not have to file bankruptcy), then the factor will assume the entire debt, even if it becomes uncollectable. Disputed transactions are where you have not provided the proper service to your customer and the factor has no control over disputes; therefore, if your customer doesn’t pay the invoice because it is disputed, you will be asked to buy back the invoice even with a non-recourse factoring program.
Non-recourse invoice factoring is usually more expensive than recourse invoice factoring. Most invoice factoring companies charge between .5% to 2% more for non-recourse factoring, mainly because of the risk involved.