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Understanding the difference between recourse and non-recourse factoring
Understand how both forms of factoring work and which one is the right finance solution for your business.
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Pages in this SectionWhat is recourse factoring?
Resource factoring is a form of finance where a company sells its invoices to a factoring company. The factor pays the company a percentage of their cash value and then chases up payment of the invoices on behalf of the company.
Once full payment is received the factor reimburses the company with the remaining balance of the invoice and this is all done for a fee. The agreement with recourse factoring finance is that if an invoice is unpaid or paid late then the company will have to absorb the costs not the factor and buy back the invoice.
What is non-recourse factoring?
Non-recourse factoring is a form of finance where a company sells its invoices to a factor and receives a percentage of the cash value from them. The factor will then chase up the invoices and once full payment is received will reimburse the company with the remaining balance of the invoice.
The agreement with non-recourse factoring is that, within certain conditions, if the payments are late or unpaid then the Factor absorbs the costs, the company does not have to worry about debt created by unpaid invoices.
What are the advantages and disadvantages of recourse factoring?
Advantages of recourse factoring:
- It's a cheaper form of finance than non-recourse factoring
- Less stringent credit checks made on the invoice clients than with non-recourse factoring
- The approval process is likely to be quick
- Most of the invoices value is paid to the company
Disadvantages to recourse factoring:
- The company, not the factor, is liable for any unpaid invoices.
- If the company can’t afford the debt created by unpaid invoices then further action can be taken by the factoring company to retrieve it
What are the advantages and disadvantages of non-recourse factoring?
Non-recourse factoring advantages:
- It can be a risk free form of finance
- Beneficial for companies whose main business comes from a small number of customers
Non-recourse factoring disadvantages:
- The cost of this type of finance can be high
- The terms by which unpaid invoices will be covered by the factoring company can be narrow so under certain circumstances the company may still be liable for unpaid debt
- It can be difficult to secure non-recourse factoring finance as the factor takes on more risk so applications can be lengthy and thorough
What are the key differences between recourse and non-recourse factoring?
The differences between recourse and non-recourse factoring are essentially who becomes liable for debt created by the non payment or late payment of invoices.
With recourse factoring finance if an invoice is unpaid or paid late to the factor then it is up to the company to buy back the invoices and either settle the debt or chase up payment with its customers.
With non-recourse factoring finance if an invoice is unpaid or paid late to the factor it is the factoring company who absorbs the debt.
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Alternative SME Lender of the Year 2023
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Best Use of Technology 2023
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