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Non-Recourse v Recourse Factoring

What happens when a customer fails to make payment for an invoice purchased by a factor? The answer depends on whether you have a recourse or non-recourse agreement.

Recourse factoring is the most common form of factoring. In recourse factoring, a factor is allowed to make a claim against the client in order to recover losses caused by customers failing to make payment. You must cover the cost of any invoice a customer does not pay.

In non-recourse factoring, the factor is liable for the underlying credit risk for each invoice factored. The client has no liability in a non-recourse transaction if the customer does not pay. The factor must either absorb the loss or take action against the customer. Non-recourse factoring typically requires an additional fee.

In reality, non-recourse factoring may not protect you as much as you think. Most factoring companies use specific provisions in the factoring agreement to limit non-recourse risk to only customers who file for bankruptcy within the first 60 days of purchasing an invoice. In addition, any claims by the customer invalidate the nonrecourse provision. Non-recourse factoring is more expensive, often by as much as a 1-3% more. Non-recourse factoring is also limited to customers who are most likely to pay. If the customer is a bad credit risk, a non-recourse factor will not purchase the invoice except on a recourse basis.

Also, remember if a customer does not file bankruptcy, put merely disappears or ceases operations, you are still liable.