Recourse and non-recourse factoring are types of invoice factoring. Invoice 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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