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.