08 May 2023 • 15 min read
Recourse & Non-recourse Factoring: Key Difference
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The primary distinction between recourse and non-recourse factoring is who is accountable for a customer's failure to pay.
A business owner sells their outstanding invoices to a factoring company at a discount when they use factoring, also known as invoice factoring or accounts receivable factoring. A portion of the invoice amount is paid to the business owner in advance by the factoring company, which subsequently handles the task of obtaining payment from the company's clients.
Recourse and non-recourse factoring are the two types of invoice factoring, and they differ in several ways, including usual fees, eligibility conditions, and who overseesoverdue payments.
Three major differences between recourse factoring and non-recourse factoring are:
Recourse factoring has less strict restrictions than non-recourse factoring. This is since either you, or your clients will always pay the invoices. Since non-recourse factoring places all the risk on the factoring provider, eligibility is typically more difficult. Additionally, you should anticipate a longer approval and funding process than with recourse factoring.
Liability of Debt
If you choose recourse factoring and a bill is still unpaid after a specified period, the bill is sent back to you. You must find a way to get rid of the bad debt. However, with non-recourse factoring, the factoring company must deal with debt resulting from unpaid invoices.
Since recourse factoring makes you liable for unpaid bills, it is less expensive. On the other hand, non-recourse factoring is the higher cost option as the risk of unpaid invoices istransferred to the factoring company, and they need to be compensated for it.
What is Recourse Factoring?
The most popular form of invoice factoring is recourse factoring. If your customers do not pay under a recourse factoring agreement, you will be liable for the debt.
The factoring company must use all reasonable efforts to get payment on your behalf. If it fails, though, it may ask for payment from you. In this situation, you must purchase that invoice from the factoring firm, or in other words, pay the money owing to it, and then make your own efforts to collect the debt from clients.
If you are unable to get payment from your consumers, you must take the loss. Considering this, recourse factoring increases the risk of potential non-payment on your part as the borrower.
What is Non-recourse Factoring?
On the other hand, with non-recourse factoring, the factoring company takes on most of the risk associated with your clients' nonpayment. In a non-recourse factoring agreement, the factoring business assumes the loss if your customers fail to repay and is liable for all efforts to recover payment from them.
Non-recourse factoring is less common than recourse factoring since it carries greater risk for the factoring company. If a factor does provide non-recourse factoring, you will normally need to demonstrate that your clients have solid credit histories and a track record of timely payments.
Differences Between Recourse and Non-recourse Factoring
The primary distinction between recourse and non-recourse factoring is who is accountable for a customer's failure to pay. The following distinctions between these two methods of factoring are frequently seen:
|Rate of advance (Amount of funding received upfront)
|Higher amount received upfront
|Lower amount received upfront.
|Lower factor fees.
|Higher factor fees.
|Pace of funding
|Faster receipt of funds and comparatively simpler approval procedure.
|It might take longer to fund. Factoring firms could have more stringent application standards or a longer approval procedure for invoices.
|It is easier to qualify, and factoring companies will do due diligence of your customers’ payment and credit history.
|It is difficult to qualify, and factoring providers will demand that your clients have solid credit histories and a track record of on-time payments.
Recourse Factoring vs. Non-Recourse Factoring: Which is Better for You?
The ideal type of factoring relies on your organisation and the situation because every method has advantages and disadvantages of its own. Consider the following queries as you choose the best approach.
Do your clients make prompt payments on their bills? Recourse factoring is the best option if the answer is "yes" because there is little chance that your consumers will fail to reimburse the factoring firm. You would undoubtedly save money in this scenario.
Do your clients frequently miss payments? It is likely that your consumers will not pay the factoring firm if they frequently miss payments. The preferable option is non-recourse factoring because you will not be held accountable for any unpaid invoices.
To know more about what export factoring is and how export factoring works, click here and you will be redirected to a detailed blog.
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