Non-Recourse Invoice Factoring: Everything You Need to Know
Non-recourse factoring is a highly sought-after option when you’re considering a new invoice factoring partner. Unfortunately, there are many misconceptions about this kind of factoring, and some companies are not entirely invested in clearing up these misconceptions. To ensure you’re getting the best arrangement for your business, you need to know the benefits and limitations of non-recourse factoring.
So what is non-recourse factoring? How does it differ from recourse factoring? And is it right for your business? Keep reading to find out!
Recourse Invoice Factoring
Recourse, in this instance, means “the legal right to demand compensation or payment.” In the case of invoice factoring, a recourse agreement means that you are responsible for re-purchasing the invoice if your customer does not pay for any reason.
A good invoice factor will not leave you high and dry, though. After all, the primary function of invoice factoring is to solve cash flow problems, and nothing kills your cash flow like unexpectedly having to re-purchase a bad invoice.
Here are some common ways merchants can pick up the cost:
- Replace the unpaid invoice with a good invoice of similar value
- Pay using the reserve (the percentage of every invoice that is withheld for fees)
- Pay in installments
Recourse factoring is the most common type of invoice factoring on offer these days. However, it’s not difficult to find an invoice factor that uses non-recourse services in some form or another.
Non-Recourse Invoice Factoring
As you might expect, non-recourse factoring means that your invoice factor cannot take recourse if your customer doesn’t pay. In other words, the invoice factor has to absorb the loss for invoices that are not paid.
In the past, invoice factoring was completely non-recourse. The invoice factor always had to absorb the loss for any unpaid invoice (with the exception of disputed invoices). However, these days, invoices covered under non-recourse are not quite so cut-and-dry.
To differentiate from traditional non-recourse factoring, some companies refer to the new method as “modified non-recourse factoring.” Regardless of the terminology, almost every factor that offers non-recourse services is referring to this type of service: non-recourse factoring through credit protection.
In other words, you do not have to re-purchase the invoice if your customer declares bankruptcy.
On the other hand, the factor will not cover the lost capital if the invoice is disputed. If your customer does not think that you fulfilled the order and will not pay, you will be held responsible.
Invoices that are unpaid or paid late due to forgetful, lazy, or disorganized customers are typically not covered under non-recourse factoring as well. However, a good invoice factor will work with you or your customer to solve the problem before charging the invoice back to you. Additionally, the risk of slow or late payments can be mitigated by finding an invoice factor who takes on collection services for your business.
Although non-recourse factoring offers benefits in the event of non-payment, there are a few drawbacks to this service. Because of the additional risk to the factoring company, non-recourse tends to be more expensive than its recourse counterpart. Additionally, a non-recourse factor may not be willing to purchase invoices for customers they cannot get credit protection on.
The Bottom Line
Non-recourse factoring may offer you more protection. However, because the definition is changeable, it’s important to be aware of what is and is not covered under a “non-recourse” agreement before settling on a factor. If in doubt, ask your potential factoring company to explain which situations are covered under non-recourse and which are not.
Although finding a factor that suits your recourse needs is important, it’s perhaps more important to find a factor that adequately communicates with you in the event of non-payment. If so, you will be able to solve problems before they become urgent.