If you plan on selling invoices it is important to know whether the funding proposal is for “recourse” or “non-recourse” factoring. Here is an overview of both methods.
A Look at Non-Recourse Factoring
Just like it sounds, there is no recourse for unpaid receivables against the client. The client selling invoices is not financially obligated to the factoring company in the event an approved and funded invoice is not paid by the customer.
To protect their investment, the factoring company will check the credit strength of account debtors and verify invoices with customers. They will also want to handle the payment collection and accounts receivable management.
Understandably, this is the most popular type of invoice financing with “non-recourse” factoring making up over two-thirds of all transactions.
This does not remove the client from all possibility of needing to repay the invoice. The client is still responsible for resolving any disputes regarding the product or service itself. For example, if the client delivers a product and that product is found faulty causing the customer to not pay, the client is still responsible to make good on the invoice.
Although non-recourse may be the more attractive method to the client, the factoring company will look closely at the creditworthiness of the paying customer or debtor and charge fees accordingly.
Now A Look At Recourse Factoring
With recourse factoring, the company selling the invoices is guaranteeing the invoice will be paid in full.
If the customer or debtor does not pay the invoice, the selling company must make up the payment. This is usually accomplished by either lowering future funding via a “reserve” or by replacing the “bad” invoice with another “good” one. Any delinquent invoices are generally charged back to the business client after 90 days, depending on the terms of the agreement.
In addition to who “makes good” on any “bad” invoices, the client may receive much better pricing if they are open to a recourse situation. Since the factoring company isn’t taking all the risk, they can offer more attractive advance rates and lower fees.
Your final choice will be for the method that best fits your situation. There is no right or wrong, but if you are comparing factoring options side-by-side and you have the option of non-recourse for the same or similar terms – then non-recourse will likely be your preferred choice!