Recourse and non-recourse factoring are types of invoice factoring. Invoice factoring (also known as debt factoring) is a financial agreement in which a business sells its invoices (account receivables) to a factoring company at a discount. With invoice factoring, a business gets access to immediate cash flow instead of waiting months for the invoices to be paid.
What Is Recourse Factoring?
Recourse factoring is a financial arrangement where a business sells its invoices or receivables to a third party (factoring company) at a discounted rate. In this setup, the business remains liable for the payment if the customer defaults. This means that if the customer fails to pay, the business is responsible for reimbursing the factoring company
What Is Non-Recourse Factoring?
In non-recourse factoring, the factoring company assumes the credit risk associated with the receivables or invoices. If the customer is unable to pay the invoices, the factoring company absorbs the loss, relieving the business of the repayment obligation.
Difference Between Recourse And Non-Recourse Factoring
| Aspect | Recourse Factoring | Non-Recourse Factoring |
|---|---|---|
|
Risk Allocation |
Seller retains risk of non-payment by the debtor. |
Factor assumes the risk of non-payment. |
|
Cost |
Typically lower fees due to seller liability. |
Higher fees to cover factor's risk exposure. |
|
Eligibility |
Easier qualification due to lower risk for the factor. |
Stricter eligibility criteria for reduced risk to factor. |
|
Terms |
Flexible terms but with increased liability. |
Less flexibility with reduced seller liability. |
Advantages & Disadvantages Of Recourse Factoring
Advantages
- Lower fees translate to cost savings.
- Flexible terms offer more control.
Disadvantages
- Increased liability in case of debtor default.
- Potential financial risks for the seller.
Advantages & Disadvantages Of Non-Recourse Factoring
Advantages
- Reduced risk exposure for the seller.
- Transfer of credit risk to the factor.
Disadvantages
- Higher fees due to the factor assuming risk.
- Stricter eligibility criteria for businesses.
Choosing Between Recourse And Non-Recourse Factoring
Recourse factoring is a financial arrangement where a business sells its invoices or receivables to a third party (factoring company) at a discounted rate. In this setup, the business remains liable for the payment if the customer defaults. This means that if the customer fails to pay, the business is responsible for reimbursing the factoring company
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FAQs
The main difference is who takes the risk if the customer doesn’t pay. In recourse factoring, the business is responsible for unpaid invoices. In non-recourse factoring, the factoring company takes the risk.
Recourse factoring is usually cheaper because the business takes on the risk if the customer doesn’t pay. Non-recourse factoring costs more because the factoring company takes on the risk for the non-payment.
Factoring companies have strict criteria for non-recourse factoring to minimize their risk. So it can be a bit difficult to qualify for non-recourse factoring. The eligibility depends on the creditworthiness of your customers and your business’s credit history, financial history, and scale.
If a customer doesn’t pay with recourse factoring, the outstanding invoice must be paid back to the factoring company by the business.
Factoring agreements may include fees for processing, handling, and other services. That’s why it’s important to read the terms carefully of the contract before signing up with a lender. In case of any confusion, always ask the factoring company to explain all possible fees.
