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.

What’s Not Covered in a Typical Non-Recourse Factoring?

In factoring, you get an advance on the value of an invoice so you won’t have to wait 30 days or more to get the money you can use as capital for your business. Small business factoring companies may advance you as much as 75 to 85 percent of the value specified in your accounts receivable. If your customer doesn’t pay, then eventually you’ll have to give back that advance. But in non-recourse factoring, you don’t have to.

Of course, it depends on the reason why your customer doesn’t pay. The typical non-recourse factoring may only cover non-payment due to bankruptcy. And that may even have a time frame involved—if bankruptcy occurs after 90 days from when the factoring company buys the invoice then it may not be covered by the factoring agreement at all.

Obviously, there are many other possible reasons why a customer won’t pay up:

  • You breached the contract. Usually, you have an agreement with your customer about what you’re supposed to provide. Perhaps you were contracted to provide 100 doodads at a specific date. But maybe you only delivered 90 doodads, or perhaps you provided the service or products a few days later than what was specified in your agreement.

Now the person you dealt with may have grudgingly accepted your products, but afterwards someone higher up in the company hierarchy may have decided not to pay you at all because you breached the contract.

  • Your customer doesn’t think that you provided the quality of service they expected. This situation is a bit more problematic. When quality is at the heart of the issue, it can be very difficult to quantify, which is why you really need to have a clear and concise contract with your customers so they cannot claim this sort of thing.

This usually happens when you provide a service. For example, if you provide janitorial services a customer may be unhappy with how dirty their office remains even after your janitors did their work. The customer may be so unhappy that not only will they stop hiring you, but they may also refuse to pay for the work your janitors renderred.

  • Your customer may simply have decided to breach their agreement with you and refuse to pay. These things do happen. You just have to deal with non-paying customers the best you can. You may start with a non-threatening letter, and then when that doesn’t work you will need to be firmer in your tone.

You may end up having to threaten them with the option of bringing in a collector. That may seriously damage your relationship with your customer, although you may argue that they started the damage by refusing to pay.

And if you bring in a collector or a debt buyer, you should be prepared for collecting less than what was owed to you. Collectors may ask up to 40% of what they collect, and they may collect less than the amount owed. Debt buyers take over your account completely, but they may only pay a small fraction of the amount owed.

If any of these situations occur, the typical result even with a non-recourse factoring agreement is that you’d need to return the money you got as an advance.

What Are Your Non Recourse Factoring Options?

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Many small businesses are familiar with the concept of factoring. This is a funding method in which you get a cash advance that’s normally 70-80% of the value of the invoice, and when the customer pays in full you get the rest of your money once the factor has taken its fees from the payment. Normally, you’d have to return the cash advance if the customer doesn’t pay, but that may not be the case in non-recourse factoring.

The Specific Definition of Non-Recourse Factoring

Each factor has its own definition of non-recourse factoring. Now it may be a perfect situation for you if the factor accepts all the risk of nonpayment, but that is almost always never the case. This isn’t a time when you tell your factor about “buyers beware”. Usually, part of your agreement with the factor is a clause requiring you to buy back the invoice from the factor when payment isn’t made.

Almost always, the definition of non-recourse factoring involves only nonpayment due to insolvency. Now here again the term “insolvency” needs to be defined clearly in the agreement with your factor. Some factors have different definitions, so you have to be on the same page.

This clearly means that if the customer declines to pay you because of a payment dispute or a disagreement regarding the quality of the goods you were supposed to deliver, the factor doesn’t assume the bad debt. Instead, you’ll be required to return the money you received as a cash advance.

Time Periods for Payment

Usually, even in non-recourse factoring there’s a time period within which the customer must make their payment in full. Most of the time, this is anywhere from 60 to 90 days. But some factoring agreements call for a return of the cash advance in just 45 days, while other factors even offer up to 180 days. This is one of the non recourse factoring options you may want to negotiate with your factor.

Payment Options

If the customer doesn’t pay for any reason other than insolvency, then the factor can recourse or ask you to buy the invoice back. This is rarely the matter of returning the money in cash. Most of the time, you’d have spent that money already.

But the factor can ask that you submit another invoice for them in exchange, and they can get the payment for the earlier cash advance from the new invoice when that new customer pays in full (and meanwhile you don’t get a cash advance from that new invoice).

Another option is to get the money back from the reserve accounts (the money not part of the cash advance). This is the money held back by the factor for this very purpose.


Non-recourse factoring is more expensive than conventional factoring, but clearly you need to know the details and definitions of their service. Take note of the non recourse factoring options, but the first thing you need to do is to determine if this type of factoring actually serves your needs.


Non-Recourse Factoring: What is It, Exactly?

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Factoring is fast becoming a very popular funding option for small businesses today. In factoring, you sell your invoice to a factor and in return you get a cash advance, which is typically about 80% the value of the invoice sold. When the customer pays in full, the factor then sends you the rest of the payment after deducting its fees. But sometimes a customer doesn’t pay at all, and that’s where recourse and non-recourse factoring comes in.

The Typical Factoring Agreement

Most of the time (79% of the time, according to a 2009 International Factoring Association survey), the factoring service you get is the recourse type. Part of the agreement states that after a given time (from 60 to 120 days), you are contractually obligated to buy back the invoice from the factor. To prevent or minimize this from happening, factors always investigate the credit history of your customers. But the factor will be paid its money, one way or another.

Since this type of factoring agreement offers the least risk to your funder, the fees involved are much lower compared to the fees involved in non-recourse factoring.

Clarifying the Meaning of “Non-Recourse”

At some point in history, factoring was essentially a sale of invoices and factors took all the risk. Factors accepted the loss when the customers didn’t pay, which is why credit investigation and payment collection are integral aspects of the services they provide.

Today, that’s no longer the case, but non-recourse factoring is still offered. But the definition of “non-recourse” may vary depending on the factor. It is very rare for a factor to define non-recourse as assuming the risk of nonpayment for whatever reason. It’s much more common to define it as not forcing you to buy back the invoice if the customer becomes unable to pay because of bankruptcy.

Drawbacks of Non-Recourse

Because there’s an additional level of risk for your factor for the non-recourse option, you’re obliged to pay higher fees for the factoring service. But that’s not all the disadvantages. The factor may also limit your sales only to well-established customers, yet require higher minimum volume commitments. And the factor may be much more intrusive in its payment collection methods.

And you also need to keep in mind that bankruptcy is hardly the most common reason for nonpayment. Your factor may demand recompense when your customer fails to pay due to financial difficulties, because they didn’t technically go bankrupt.

The customer may have also failed to pay because of a dispute with you regarding the terms of the agreement. For example, they may declare that the goods you delivered were not in the quality or quantity specified in the contract. They may claim that the goods sent them were damaged or not good enough. If that’s the case, then the factor reserves the right to demand that you buy back the invoice of that customer.

So when is non-recourse factoring appropriate? It can act as insurance for you when the vast majority of your business comes from a handful of large companies. Since non-payment from one customer can have a very damaging effect on your business, it may be better for you to transfer the risk to the factor.

Types of Factoring Business

Types of Factoring Business

If you are contemplating the possibility of availing the services of a factoring business, then by now you know that invoice factoring (also known as “business factoring”) is one way of quickly providing your company with working capital. Factoring is a business transaction, during which your company gets instant cash by selling its accounts receivable invoices to a factoring firm at a discount.

There are generally two types of factoring services you can avail. The right factoring service for your company depends on who is held liable for the debts when some customers are unable to pay. The two types of factoring to consider are (1) recourse factoring and (2) non-recourse factoring.

non-recourse factoring, recourse factoring
There are generally two types of factoring services you can avail. The right factoring service for your company depends on who is held liable for the debts when some customers are unable to pay. The two types of factoring to consider are (1) recourse factoring and (2) non-recourse factoring.

Recourse Factoring

This type of factoring is usually more preferable because the cost is generally less. The lower cost is due to your company’s decision to still shoulder the burden of bad debt instead of passing the risk to the factoring company. Because the factoring company does not take on the risk, your company should get this agreement rather quickly, as the factoring company should have less stringent rules regarding your business systems. The factoring company will also be less stringent about the payment history of your clients.

After the agreed upon time—usually 60, 75, or 90 days—your company is required to buy back the invoice from the factoring company if the customers are unable to pay. Recourse factoring is recommended if your customers are reliable about the payment, because if many of them are unable to pay then you would have to return the money paid to you by the factoring company, with the standard fees and interest.

Typical Non-Recourse Factoring

Most factoring companies define non-recourse factoring to mean that your company has no further liability for the unpaid invoice should a customer become unable to pay due to insolvency. If the customer declares bankruptcy and becomes unable to pay after the appointed time (usually the same period of time as recourse factoring), then you are under no obligation to return the advance you received from the factoring company. However, if the customer won’t pay the invoice for any reason other than bankruptcy, then even with the non-recourse factoring agreement in place the factoring company will require your company to buy back the invoice.


In this type of non-recourse factoring, the factoring company shoulders the entire risk of unpaid invoices. If for any reason the customer is unable or unwilling to pay the invoice—they don’t have to be insolvent—then the risk falls on the factoring company. If the debt cannot be collected, the loss is on the factoring company.

The sole exception to this is when the customer disputes the invoice; for example, the customer refuses to pay because your company is accused of not providing the service or product properly. Because the factoring business is outside this dispute between your company and the customer, then even with this version of the non-recourse factoring agreement you will still be required to buy back the invoice.

This type of factoring is usually more expensive and a factoring business will typically charge about 2-5% more, because of the additional risk involved.

Whats Non Recourse Factoring, What is Recourse Factoring

Today non recourse factoring has become the most confusing topics in the industry and potential clients normally have the wrong expectation with regards to this solution.

non-recourse factoring is: It is a factoring service where the factoring company assumes the risk of non payment if the client is not going to pay the invoice due to insolvency during the factoring period. This meaning can sound a little confusing to many. Additionally, non recourse factoring options varies by company, but this definition normally holds true.

In simpler terms, this usually means that when your customer cannot pay the invoice due to financial distress (i.e. bankruptcy) that happens throughout the factoring period, in that case you are covered.

The invoice factoring period is usually defined as the 60 to 90 days that a customer has to pay the invoice back.

One example is, the following items are usually NOT covered in a non recourse arrangement even though many clients who hope were covered:
• Payment disputes of any kind
• Product or service disputes
• Late payments

Keep in mind that non recourse factoring offers some defense against credit risk, it does not offer protections against disputes and overall performance problems. Essentially, non recourse factoring usually covers you if your client suddenly goes bankrupt during the factoring period. It might be an important protection but it’s not all inclusive.

One additional point is that while unforeseen bankruptcy do happen – current credit analysis technology is reasonably good at discovering the warning signs that happen prior to a bankruptcy. Most factoring companies will keep an eye on your customer’s credit regularly anyway and will advise you if they detect any increase in the level of risk.

The specifics of how the non recourse factoring plans operate are defined in the factoring contract. It’s a good concept to review the contract with a competent attorney to make sure you understand it.