The Difference Between Recourse and Non-Recourse Factoring
Invoice factoring is an awesome way to free up working capital for business growth. It allows you to convert long-term assets into immediate cash. This way, if you have urgent needs, you can use your own assets to cover them instead of having to take on debt or charge purchases to your business credit card. To maximize the benefits of a cash advance, it pays to choose the right type. Business owners can choose from recourse factoring, traditional non-recourse factoring, and modified non-recourse factoring. What’s the difference?
What Is Factoring?
In this type of financing option, you “sell” an unpaid invoice to a financing company called a factor. They give you a large portion of the invoice’s value immediately, and a final portion when your customer finally makes payment. The factor keeps a small percentage of the profits as payment for the service. For example, if your unpaid invoice is worth $1,000, you may receive a cash advance of $750 immediately. Once your customer pays the invoice, the factor deposits another $260 in your account, keeping $30–$40 as payment.
How Do Recourse and Non-Recourse Factoring Options Work?
The most common type of factoring is recourse factoring. This option means that if your customer goes bankrupt or refuses to pay, the factor can require you to buy the invoice back. This isn’t something that happens a lot, because the approval process usually considers your customers’ credit history. Helpful factors may offer additional options that let you deal with unpaid invoices in a way that’s comfortable for your business’s cash flow.
Non-recourse factoring basically says that you’re not responsible for unpaid invoices. Traditional non-recourse options don’t hold you responsible for any amount of these factored bills. Modified non-recourse programs protect you in case your customer goes bankrupt, but they don’t shield you from customers who deliberately refuse to pay. This hybrid option is the second most common type of factoring.
What Are the Benefits of Recourse vs. Non-Recourse Factoring?
If you’re willing to repurchase unpaid invoices, it can provide lower interest rates for your business. That’s one reason why recourse factoring is so popular. It enables you to free up capital when needed while keeping overall transaction cost relatively low. If you’re not worried that your clients are going to have bankruptcy issues, then this is probably the best choice for you.
However, non-recourse factoring can also be beneficial in certain situations. For example, if your day-to-day expenses are always tight, and you can’t afford to risk a client not paying, then you may want to choose non-recourse plans. The upfront fees are worth it in this case because of the protection you receive.
