To Recourse or Not to Recourse - that is the factoring question

For those of you who factor, you have two options when shopping for factors.

Recourse and non-recourse factoring are two methods of financing where a business sells its accounts receivable to a third party (the factor) to improve cash flow. Here’s how they differ:

Recourse Factoring

Responsibility for Bad Debt: In recourse factoring, the business retains some responsibility for unpaid invoices. If a customer doesn’t pay their invoice, the business must buy back the debt from the factor or replace it with another receivable.

Cost: Generally, recourse factoring has lower fees compared to non-recourse factoring since the factor takes on less risk.

Use Case: It’s often chosen by companies that have confidence in their customers’ ability to pay and are willing to assume some risk.

Non-Recourse Factoring

No Responsibility for Bad Debt: In non-recourse factoring, the factor assumes the full risk of bad debts. If a customer fails to pay, the factor absorbs the loss, and the business is not required to buy back the debt.

Cost: This type tends to have higher fees due to the increased risk for the factor, as they are taking on the possibility of bad debts.

Use Case: Non-recourse factoring is ideal for businesses that want to minimize their risk and are dealing with customers who may have uncertain creditworthiness.

Summary

In essence, the main difference lies in the risk associated with unpaid invoices. Recourse factoring keeps some liability with the business, while non-recourse factoring transfers that risk to the factor. This choice impacts the cost, the level of risk a business is willing to take, and its overall cash flow management strategy.

PRO-TIP

Find a factor that offers the same non-recourse rate as recourse factor!

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