Recourse vs. Non-Recourse Factoring
Have you ever wondered what happens if your customer doesn’t pay on a factored invoice? Even worse, what if they declare bankruptcy? The answer to these questions depends on the type of factoring you decide to use. While our last post covered Invoice Factoring Rates, we now turn our focus to the differences between the two primary types of factoring; recourse and non-recourse.
Recourse Factoring
This type of factoring is the most common and the most affordable. In the simplest terms, by entering into a recourse factoring agreement you agree to pay the factoring company for any factored invoices that go uncollected. You are essentially “guaranteeing” the invoices you factor, so if your customer doesn’t pay, you’ll have to pay the factoring company what your customer owed. Typical recourse periods include 60 days, 90 days, and in some cases even longer. If you enter into a recourse factoring agreement, you’ll want as long of a recourse period as possible since this specifies when you’ll be on the hook for uncollected invoices.
Non-Recourse Factoring
True non-recourse factoring puts all of the collection risk onto the factoring company. What this means is that if your customer doesn’t pay on a factored invoice, then it’s the factoring company’s problem and you need not reimburse them for the uncollected amount. In this way, non-recourse factoring is most like a true “sale” of your receivables in which there are no conditions or performance requirements attached. Since the factoring company is taking on all of the collection risk, non-recourse factoring is always more expensive, all else being equal.
If you’ve been paying attention, you’ll notice that the above explanation is in regards to “true” non-recourse factoring. The fact of the matter is that most non-recourse programs offered by factoring companies today aren’t so generous. Many of today’s non-recourse programs still have a recourse period because the non-recourse provision only applies to non-payment due to insolvency/bankruptcy. As a result, it’s vitally important to review any agreement in detail in order to see exactly what is covered by the non-recourse language.
Which is Best?
While “true” non-recourse factoring has some appeal, it is becoming harder and harder to find at reasonable rates. Programs that only cover insolvency situations are also becoming less desirable as the economy continues to improve and bankruptcy filings decline. Business bankruptcy filings for the year ended March 31, 2015 have declined over 50% from the number of filings for the year ended March 31, 2011 as detailed in this United States Court Article. In our experience, the additional costs of the “watered down” non-recourse programs that many factoring companies offer is simply not justified by the benefits. While there will always be some businesses that will be best served by a non-recourse program, our opinion is that most will see an overall cost savings by using a cheaper recourse program.
If you’d like to learn more about the programs and rates we offer, please feel free to contact us now using this link, we’re happy to help!