We have recently written articles about non recourse factoring and about recourse factoring and wanted to opportunity to make a side by side comparison of the products. This should better help you decide which one is better for you. We’ll start by saying that the subject of recourse and non recourse factoring is one of the most misunderstood of the industry. We think it’s a combination of the fact that the term non-recourse is used in other financial products and has a very different definition. We hope that this short article clears this up and help you in deciding which product is best for your company.
A commonly accepted definition of non recourse financing is “a loan that is secured by collateral – where the lender can only pursue the collateral – and not the borrower – in case of default.” Most people read this or something similar and assume that it applies to factoring in the same way. They believe that in non-recourse factoring, if the customer does not pay the invoice for whatever reason, they will be protected against the loss because the factoring company will absorb it since their only collateral is the invoice. For the most part – this is a wrong assumption.
In most cases of non recourse factoring, an invoice is factored with the expectation that the customer will pay the invoice in 90 days. If the customer does not pay the invoice within 90 days, the client has to pay the factoring company back unless the end customer declares insolvency within those 90 days. This is a very important detail: the non recourse invoice factoring program only protects you if the invoice is not paid due to a customer insolvency and only if the insolvency happens within the 90 day period. For example, if a customer does not pay the invoice because they have a dispute or are simply low on funds – you will most likely still be liable to the factoring company after 90 days. Note that the implementation of non recourse factoring varies by factoring company – but most use a version of the model described in this article.
This type of factoring is a lot simpler. In recourse factoring, an invoice is factored with the expectation that the customer will pay the invoice in 90 days. If the customer does not pay the invoice within 90 days, the client has to pay back the factoring company.
Which is better – Recourse or Non Recourse Factoring?
This is difficult to answer since it depends on what you are looking for. But keep this in mind, regardless of which factoring plan you get, all factoring companies check the credit of your invoices thoroughly before advancing any funds. This provides your company (and the factoring company) with a level of credit protection since it will likely root out any problem invoices before funding. However, a non recourse factoring program will also protect you against an unexpected customer default. Although rare, these do happen and non recourse factoring offers some protection against it. Ultimately, your best bet is to review your options with a competent CPA or attorney who can advise you specifically as to which plan is best for you.
Disclaimer: Each factoring company offers their own version of recourse or non recourse factoring and you should seek professional help when evaluating factoring opportunities. This article is not intended as legal or financial advise.