Recourse vs. Nonrecourse Factoring
Recourse AR Factoring
What is Non-recourse Factoring?
Non-recourse AR Factoring
- Doesn’t require the business to repay the factor if the customer does not pay for covered reasons.
- Covered reasons the factoring company pays for the may include inability to pay due to financial hardship, insolvency of the customer, and sometimes slow payment.
- Non-recourse factoring can be more expensive than recourse factoring, but it’s less risky for the business.
Recourse AR Factoring
- The business is responsible for any unpaid invoices, and the factor can come after them for repayment.
- Recourse factoring is a good option for businesses that have strong relationships with their customers and know they will pay their invoices on time.
- Accounts receivable factoring loans must be repaid in full by the customer or the client. There is no credit protection from the full recourse accounts receivable factoring companies.
Factors to Consider
- The credit quality of your customers
- The terms of the factoring agreement
- The fees associated with recourse AR factoring vs non-recourse AR factoring
- Have customers with poor credit
- Want to save on fees
- Are willing to take on the risk of non-payment from their customers under the invoice factoring program
- Have customers with good credit
- Want to avoid the risk of non-payment from their customers
- Are willing to pay higher fees for the peace of mind of non-recourse protection.
- Realize benefit when factoring company assumes the credit risk.
Accounts Receivables Factoring FAQ
How does account receivable factoring work?
The process for accounts receivable factoring is pretty basic. After you invoice your customer the factor will purchase that AR at a slight discount and the customer pays the factor directly.
Is accounts receivable financing the same as account receivable factoring?
Yes and no. Factoring is a form of AR financing, but there are other forms as well such as asset based lending. Under an ABL facility a lender may lend against the open invoices but does not necessarily factor them, or purchase them.
How much does accounts receivable factoring cost?
Account receivables factoring should cost somewhere between 1-3% per 30 days depending on the volume of AR you have and the quality of your customers.