Understanding the difference between recourse and non-recourse factoring is crucial for anyone looking to manage cash flow by factoring invoices. Recourse factoring means you cover unpaid invoices; non-recourse offers you protection in certain circumstances, but at a higher cost. This article breaks down both types, helping you decide which is best for your business.
Notes on Non-Recourse Factoring
- Non-Recourse factoring is a widely used term
- The definition of “non-recourse” varies between different factoring companies
- Read and understand any factoring agreement before signing
What is Invoice Factoring?
Invoice factoring is where a company sells the value of outstanding invoices to a third-party company called a factor. The factor pays the company in two installments.
The first installment is a lump-sum advance paid to the company when the invoices are factored. The advance installment will be a large portion of the total value – usually 70% to 95%.
The factor assumes responsibility for collecting the invoice payments from customers. When customers pay invoices, the factor takes a small finance fee and then pays the remaining amount to the company. The second installment is often called a rebate.
Recourse vs Non-Recourse Factoring
To illustrate the difference between recourse and non-recourse factoring, let’s say that one of customers in the example above declared bankruptcy during the factoring period and cannot pay their invoice.
A recourse factoring agreement requires the company to buy back the invoice. Depending on the agreement, the factor could give 60 to 120 days to pay back the debt. If cash is unavailable, the company would need to provide a new invoice of equal or greater value as collateral.
With a non-recourse factoring agreement, the company does not have to pay back the factor for the defaulted invoice amount. Non-recourse factoring only offers default protection for the advance installment, not the rebate, so the company would still incur a partial loss.
Is Non-Recourse Better?
Focus on getting the maximum advance with the lowest factoring rate (use our Dollar Cost Calculator). This will provide you with the most cash — for the lowest cost.
If competing factor companies are offering the same rates, but one offers non-recourse, it is often best to go for the extra protection.
Approximately 80% of all factoring companies offer recourse agreements. Recourse factoring may have a lower factoring rate than non-recourse because of the reduced risk for the factoring company.
Non-recourse offers lower risk to your company, but it’s not entirely risk free. Although non-recourse offers more protection, there are many instances where you are still liable for your customer not paying. See more below about qualifying credit events.
Factors assess the credit of every invoice, and their rates will reflect the risk. If your company can break even on the advance rate, non-recourse could be a safe option since the rebate installments will be all profit.
Best Non-Recourse Factoring Companies
Riviera Finance prides itself on its speed of funding, reliability and flexibility. Riviera Finance services a range of industries, including trucking, wholesalers, staffing, and manufacturing.
Riviera emphasizes the stability of their own business as a selling point, claiming to have turned a profit every year since 1969 — and is still under their original ownership. With years of experience, their team is extraordinarily knowledgeable while still being easy to talk to.
Expect Riviera’s contract to be shorter and easier to read than most factoring companies.
| Advance Rate | 95% |
| Discount Rate | Starts at 2%, volume discounts available |
| Recourse or Non-Recourse | Full-service, non-recourse factoring |
| Speed of Funding | Within 24 Hours |
| Revenue Requirements | No minimums, up to $2 million in monthly sales |
eCapital offers the quickest funding of all the factoring providers we reviewed. They offer immediate funding on new invoices and a revolving line of credit through their partnership with Visa — allowing for instant access to funds.
Unlimited credit checks are available for non-recourse factoring. eCapital’s database contains information on over 40,000 companies. It’s a great way to check out clients beforehand and mitigate risk.
eCapital works when you do and their back office support is available even on weekends. They also have an onboarding process to walk new clients through their platform.
| Advance Rate | Up to 100%, one of the highest in the industry |
| Discount Rate | Between 1% and 5% |
| Recourse or Non-Recourse | Non-recourse factoring is available |
| Speed of Funding | Immediate funding and revolving line of credit |
| Revenue Requirements | Rates and fees may be determined based on income |
To make your choice easier, eCapital currently offers a 90-day trial period.
SMB Compass provides business owners and companies a wide range of financing solutions. A benefit of working with SMB Compass is that you’ll be able to access all types of capital including invoice factoring, bridge loans, and equipment financing.
SMB Compass primarily helps a broad range of industries which includes commercial construction, trucking and logistics, staffing, wholesale, distribution, manufacturing, government contractors,.
In addition to their friendly and helpful customer service, one thing that stands out about SMB Compass is their program flexibility. Their invoice factoring programs include both notification, non notification, and revolving line of credit options.
Other features include:
- Same day funding
- No minimum monthly volume commitments
- No long term contracts
- Fuel cards with average savings of 45¢ per gallon
| Advance Rate | Up to 97% |
| Discount Rate | Starting at 1% |
| Recourse or Non-Recourse | Non-Recourse and Recourse Available |
| Speed of Funding | Same Day |
| Revenue Requirements | $10,000 per month |
OTR Solutions has a portal that makes it easy to check your customer’s credit. It’s available online 24/7, and it’s as simple as entering your customer’s MC number. OTR also offers a wide range of services including fuel cards, tax assistance, equipment financing, and insurance.
OTR has a mobile app to help with factoring services while on the go. Within the app, uploads, data, notes, and paperwork can all be managed. OTR’s technology based approach makes it easy to streamline processes and get work done while you’re out of the office.
Funding with OTR Solutions is usually within 24 hours, but there’s also an instant funding option. A bonus is the ability to get deposits even on most bank holidays.
| Advance Rate | Up to 100% |
| Discount Rate | From 1% to 4% |
| Recourse or Non-Recourse | Recourse and non-recourse are both available |
| Speed of Funding | Within 24 hours, or instant funding option is available |
| Revenue Requirements | No minimums |
Benefits of Non-Recourse Factoring
Provides Working Capital
For a small fee, invoice factoring gives your business a cash advance on future payments. You can use this cash to pay expenses or invest in growth.
Compared to alternative financing options, invoice factoring offers very competitive rates. There are at least 50 factoring companies competing nationwide, which helps to keep the rates low.
Your Credit Score Doesn’t Matter (Much)
Your credit history is one of the least important factors for determining your eligibility for invoice factoring. If you have bad credit, it could mean a slight rate increase, but it will not make a huge difference.
Your customers’ credit and invoice value matter a lot more.
Helps You Avoid Credit Risk Clients
It is difficult for a small business accounting team to do thorough credit checks on every client. A factor can help provide guidance on prospective customers and their likelihood of default.
If they determine a client has bad credit, you can ask them to pay in advance to limit your exposure.
Downsides of Invoice Factoring
Credit Limits
Your customers must have good commercial credit to qualify for invoice factoring.
It’s less of a concern for recourse agreements, but factor having faith your customers will pay is the foundation of every transaction.
Non-Recourse Credit Events
Most non-recourse agreements narrowly define insolvency as a declared bankruptcy during the factoring period. Some factoring companies have broader terms that cover default for any credit event.
There are no set industry standards, so pay attention to the details before you sign an agreement.
It’s worth mentioning that a non-recourse invoice factoring agreement does not usually offer protection against customer disputes or late payments. In most cased you would still be liable if your customer:
- Cancels an unfulfilled order
- Delays a payment while resolving a product quality dispute
- Is unhappy with the service you provided and decides not to pay
- Disputes the invoice and pays a lesser amount
Remember that factoring is about shortening the gap in receivables to improve cash flow on good debt. While non-recourse factoring provides some additional protection, it is not the same as accounts receivable insurance.
Final Thoughts on Non-Recourse Factoring
There are times you might need the most cash possible – and that’s ok – even if it means not taking the lowest rate. And if you’re in a rush to get cash, keep in mind that recourse factoring is quicker to get set up because of less stringent credit checks.
Invoice factoring remains one of the most popular and affordable methods of business financing. As you review providers and proposals, pay attention to the advance rate and per dollar cost of each. If competing factor companies are offering similar dollar cost, but one offers non-recourse, go for the extra protection.
