When choosing to factor your invoices, there are two primary types of factoring to consider: recourse and non-recourse. Recourse means that you’re ultimately responsible for the payment of an invoice if your customer doesn’t pay. Non-recourse means the factoring company is primarily responsible for collecting on unpaid invoices. It seems simple, but the protection that non-recourse factoring affords often comes with stipulations.
Here are the considerations a business needs to understand before choosing non-recourse.
There Shouldn’t Be Recourses to Begin With
A recourse on an invoice means the factoring company requires you, the customer, to buy back the unpaid invoice. If you are working with the right factoring company, though, you shouldn’t have any recourses. Recourses typically happen for a few main reasons: there are issues with the load, there is a service failure or there is missing paperwork. A reputable factoring company will help underwrite the credit risk and will make sure you get paid if you’re working with the right brokers. They may still offer non-recourse options, though, to ensure you get paid in certain circumstances, specifically bankruptcy.
Non-Recourse Factoring Isn’t Always What It Seems
With non-recourse factoring, you depend on your factoring company to collect debts even from a non-paying client. The catch is that there are specific circumstances that must be met before your invoice is truly eligible for non-recourse. A customer simply not paying their invoice isn’t grounds for completely absolving you of responsibility. Typically, the non-recourse arrangement only kicks in when a non-paying client files for bankruptcy during a specified amount of time after the invoice was sent. This leaves a lot of other non-payment situations completely off the table that you may not have realized aren’t covered.
Furthermore, because of the bankruptcy requirement, many factoring companies only offer non-recourse agreements that only apply to debtors with a good credit rating. This eliminates a lot of the risk of those debtors filing bankruptcy, which makes the non-recourse agreement unnecessary.
It’s Typically More Expensive
Non-recourse factoring agreements often come at a higher factoring rate (sometimes almost a full percentage point higher). Over time, this can end up costing you more money, especially if you don’t need or are not seeing the benefits you were expecting under such an agreement.
If you’re considering paying more for a non-recourse agreement, it’s important to fully understand what non-recourse actually means to your specific factoring company.
Still have questions about non-recourse factoring? Reach out to RTS Financial today.