Recourse vs. Non-Recourse Factoring
When you sign a contract for factoring services you need to know if you are signing a recourse or non-recourse agreement.
In a recourse factoring agreement, if your customer does not pay the invoices that you sold to your factor, you will have to buy the invoice back from the factor. This protects the factoring company from being badly hurt by unpaid invoices and in exchange for that reduced risk, the factoring fee is less than a non-recourse fee. The benefits of a recourse agreements include the following:
- Significantly less stringent rules regarding your business systems and payment history of your customer.
- Lower fees
- You are in control of the final collection process and outcome with your customer rather than the factor. This is important if for some reason you want to preserve the business relationship with the customer and not put them into a debt collections process.
In a non-recourse factoring agreement, the factor takes all the risk if your customer does not ever pay, the factor has to deal with that loss. Obviously, the factor will charge more for this type of arrangement because their risk is higher. Non-recourse agreements are very rare. You should carefully read the fine print on anything saying it’s non-recourse becuase there usually are exceptions. Most non-recourse factoring agreements only cover very specific instances of non-payment like actual bankruptcy filing. Otherwise, you may end up being forced to buy the invoice back from the factor. Always read very very carefully something claiming to be non-recourse. When it comes to Non-recourse you will pay a higher fee for what is often only an illusion if your customers fail to pay.
The risks of “Non-Recourse” Factoring Agreements Are:
- A more difficult approval process as the factor does extended background checks on your customers to ensure they have no payment history issues, or known business problems.
- Higher Fees
- There are actually fine print recourse clauses that do force you to buy back the invoice except for certain circumstances.
- Putting a the factor in charge of final collections with your customer may result in losing a customer that you wanted to keep.
In a 2009 IFA (International Factoring Association) Survey they found that 78.9% of all factoring companies factored on a RECOURSE basis.