Non-recourse factoring is one of the most misunderstood subjects in the field of factoring finance – perhaps because use of the word non-recourse varies across the finance industry. Let’s first start with full recourse factoring agreements, since they are the simplest to understand. In a recourse factoring agreement, the client agrees to buy back the invoice from the factoring company if the invoice is not paid within the factoring period – usually 90 days. Said simply, your company buys back the unpaid invoice after 90 days regardless of the reason for non payment.
The other side of the coin: Non recourse
Non-recourse factoring is a little bit more complex because each factoring company implements their own version of it. You should ask your factoring company if they offer it – and if they do – inquire as to what is covered under their non-recourse agreements. But for the most part, in a non-recourse agreement, the client does not have to buy the invoice back if (and only if) the invoice is not paid due to a customers declared financial insolvency and if (and only if) the insolvency happened during the factoring period. As you can see, there are a lot of conditions in this definition.
The first conclusion that you can draw from this is that non-recourse factoring does NOT offer a blanket protection against customer non-payment. Not even close. It only offers protection against certain types of client insolvencies. This means that an invoice could be sold back to you if there is a dispute or if your client is unwilling to pay, except due to an insolvency.
One thing we’d like to add is that factoring companies are quite good at evaluating customer credits and do their best to avoid buying invoices from companies that are in financial problems – irrespective of your type of factoring agreement. So using your finance company’s credit evaluation facilities should offer some protection in itself.
Lastly, please note that each invoice factoring company offers recourse/non-recourse factoring in their own way. You should have an attorney review your agreement and explain all the details to you before engaging the factoring company.
Update: Here is a side by side comparison of recourse factoring vs. non recourse factoring.