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.