Recourse vs Non-Recourse Factoring: What Are the Differences?
Factoring invoices benefits your business by supplementing your working capital without having to wait for the long period of time between issuing the invoice and receiving invoice payment. The factoring company waits to receive payment from your customers while your business continues operations. However, if your customer was unable to pay the factored invoice, the consequences will depend on your factoring agreement.
Types of Factoring
There are two types of factoring: recourse and non-recourse.
Recourse factoring is the most common form of invoice factoring. In recourse factoring, if your customer fails to repay the invoice, you will be responsible for paying the invoice amount.
Non-recourse factoring entails the factoring company assuming the risk of unpaid invoice, as long as your customer meets the factor’s criteria of acceptable customers for non-recourse factoring.
Which Type is Right for Your Business?
While non-recourse factoring initially sounds more beneficial for your business, both types of factoring come with clear advantages and disadvantages.
The benefits of recourse factoring are that it is significantly less expensive and less complex than non-recourse factoring. Non-recourse factoring comes with additional and higher factoring fees and the non-recourse provisions are usually very narrow, such as if your invoiced customer were to declare bankruptcy.
The benefit of non-recourse factoring is that your business is not responsible for non-payments, which eliminates bad debt as a potential concern. You also do not have to worry about invoice collection.
Additionally, as invoice factoring will look towards the creditworthiness of your customers, if your customers are not creditworthy, then it will be very difficult to qualify for non-recourse factoring. However, recourse factoring is still an option and is much easier to qualify for than for non-recourse factoring as the factor would also take into account your creditworthiness since you may become responsible for the invoice payment.
Both recourse and non-recourse factoring are used by businesses of different industries. Trucking and freight companies prefer recourse factoring as it is unlikely for them to meet the non-recourse provisions and they would also prefer to have the extra cash gained through recourse factoring.
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