vs. Non Recourse Factoring
question asked most often about factoring is:
if my customer refuses or is unable to pay an invoice that I have
sold to my Factor?"
The answer is: It depends on what type of factoring agreement
you have in place with your Factor. The two main types are Recourse
and Non Recourse factoring. Most factoring companies
will only do one or the other. Some factors now offer a hybrid
agreement called Modified Recourse factoring.
the event that a Debtor does not pay the invoice, recourse factoring
allows the Factor to come back to the Seller for payment. The
risk of insolvency does not transfer to the Factor when an invoice
is purchased. If a customer refuses or is unable to pay the invoice
(due to bankruptcy), you (the Seller) must buy back the unpaid
invoice or exchange it with another receivable of equal or greater
value. Since Recourse Factoring offers the least amount of risk
to the Factor, this factoring agreement offers the lowest fees.
Modified Recourse Factoring
modified recourse factoring the Factor carries receivables/credit
insurance and offers protection to the Seller if the customer
is unable to pay the invoice due to financial failure or bankruptcy.
However, if the customer refuses to pay the invoice from a dispute
over quality, delivery, or specifications, the Factor has recourse
back to the Sellers other receivables.
Non Recourse Factoring
Non Recourse factoring the risk of insolvency and non-payment
is completely transferred to the Factoring company. If the customer
goes bankrupt or refuses to pay the invoice (for whatever reason),
the Factor cannot come back to the Seller for payment.
This method of factoring carries more risk for the factoring company
and therefore factoring fees are higher.
Which One is Better?
the seller, if you are comfortable with the account debtor's (your
customer) ability and willingness to pay the invoices, recourse
factoring is better due to the lower factoring fees incured (the
discount rate). Non Recourse factoring is favorable when minimal
risk is more important than higher factoring fees, such as with
larger invoices or customers who's financial status is questionable.
factoring companies only offer Recourse Factoring and do not offer
Non Recourse as an option.