The Drawbacks of Non-Recourse Factoring

In regular factoring, you receive an average of 80% of the value of the invoices you submit in advance. You get the rest when the customer pays in full, and only after the factoring company takes its percentage off the top. The factoring company has the recourse to get its advance back from you if your customer doesn’t pay within a specified time period, which is usually 90 days. But in non-recourse factoring, the factoring company doesn’t have that option.

This looks like a better deal for you, because you won’t have to return the advance if your customer suddenly declares bankruptcy. But looks can be deceiving, and your non-recourse options may not look so attractive when you realize the consequences.

Limited Invoices for Factoring

The first disadvantage is that some of the invoices that may have been factored would now be rejected. In factoring, the factoring company always investigates the creditworthiness of your customers. If they think that the customer is too risky to extend credit to, then they may refuse to provide an advance or demand higher fees with lower advances.

But with non-recourse, the definition of “risky” becomes broader. Some invoices that would have been factored in the regular recourse factoring method will now be rejected if they pose any kind of risk that they may become bankrupt.

Lower Advances and Higher Fees

Even if a customer is now approved for factoring, the advance you get from the value of the invoice will be lower. In regular factoring you get an 80% advance on average. Now 80% probably represents the highest possible advance you can get. In general you’ll get a lower amount than that, and some small business factoring companies may even just offer 40% of the invoice value.

And yet, while the factoring companies try to minimize their financial risk, the fees they ask for will increase because of the inherently higher risks with non-recourse factoring. The average 3% in fees that factoring companies ask in regular factoring may jump to as high as 6% per 30 days. That’s in addition to other standard fees that your factoring company may charge you with that are part of the non-recourse option.

Affected Customer Relations

When you’re engaged in non-recourse factoring and you have a new customer, your factoring company plays a greater role in how you deal with that customer if you want the resulting invoice factored. The factoring company can determine which customers should be offered credit, and they may even insist on a credit limit for certain customers.

The factoring company may also have a different approach to collections as well. In regular factoring, they can remain friendly when sending reminders, because they know that if the customer doesn’t pay up then you have to send back the advance you got. But now the factoring company may become firmer in insisting that your customer pays on time so they can be sure of getting their advance back from the customer.

All in all, there may be some instances when non-recourse factoring may work very well for you. But in general, you may want to stick to regular factoring so that you can maximize your funding and limit the fees you pay.

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Chris Lanchech

Hi everyone, my name is Chris and I am a junior analyst at Neebo Capital and an inspiring blogger. We enjoy speaking with business owners and entrepreneurs who come to Neebo Capital looking for cash flow solutions. Give us a call toll free at 1-888-382-3766 or Visit us online at www.neebocapital.com

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