When weighing between factoring facilities, you often hear the word recourse. Let’s go examine what it means (both recourse and non-recourse factoring) and how it may impact your business.
What is Factoring?
Factoring is a business finance facility that allows businesses to sell its outstanding invoices or accounts receivable to a third party for a small fee, thereby receiving funds upfront instead of waiting for their customers to pay. Advances are typically up to 90% of the invoice value.
Payments from the end customers (debtors) will then be made directly to the third-party financier. The financing is settled once payment against the funded invoice is received. Any remaining balance will then be disbursed to the business (i.e. remaining 10% of the invoice value less interest and fees)
What is Recourse Factoring?
In a recourse factoring arrangement, your business will ultimately be liable for any non-payment by your end customers (debtors). This includes (but is not limited to) disputes, exceeding anticipated pay dates, credit note offsets, or if the debtor goes under administration.
This means you are required to buy back the funded invoice from the factoring company and to collect the outstanding payment from your end customer. Your business assumes all non-payment risks.
What is Non-Recourse Factoring
On the other hand, with non-recourse factoring, the factoring company holds all responsibility to collect payment and accepts all the risks of non-payment by the end customer. Such an arrangement would usually equate to higher fees and lower advance rates than recourse factoring.
It is also more difficult to qualify for a non-recourse factoring facility as you will need to instantiate a strong track record of on-time and non-dilution in payments from your customers.
What does this all mean?
Factoring facilities are commonly structured on a recourse basis. Hence, it is best that you select for factoring the invoices that are issued to clients who are reliable and creditworthy to avoid payment headaches in the future.