Recourse factoring can be seen as an agreement where a company sells its current invoices to the third party or a factoring company with the understanding that the company will buy invoices back if in case they go uncollected. This recourse factoring plan is generally affordable as the company agrees to absorb some of the risk that will be involved in the transaction.
Recourse factoring can be considered as an agreement between the seller and the factor. In this type of factoring, the company is responsible to recover the cost of invoices which the liable buyers fail to pay. It means, if the customer does not pay the invoice within the specific time, the Factoring Company can revert back or can charge that invoice back to the seller, or that invoice can be replaced with another good invoice.
Non-recourse factoring allows a company to sell its unpaid invoices to a factoring provider without the obligation of absorbing any unpaid invoices. Instead, if the clients renege on their payments or even pay their invoices after due date, the involved losses are absorbed by the factor, that too leaving the business unscathed.
In Non-recourse factoring, the factor accepts the credit risk of non-payment of your customers. Businesses which don’t get qualified for the Recourse Factoring can take Non-recourse Factoring into consideration. Thus, the Factoring Company will assure you with a credit guarantee that they will be responsible for the collection of invoices on seller’s behalf. It might be all your invoices or just those from certain clients. Generally, this guarantee is valid in case your buyer files for bankruptcy. This is not a guarantee against your commodities rather this is an “insurance policy” against bankruptcy which can be critical for your survival.
|Recourse factoring||Non-recourse factoring|
|Business accepts the liability for unpaid invoice||Factoring company accepts the liability for unpaid invoice|
|Much relevant in terms of cost||Higher fees|
|High advantage rate||Low advantage rate|
|No help on disputes||Help with disputes|
|Credit risk is borne by client||Credit risk is borne by factor|
|Typical rates from 1% to 3%||Typical rates from 4% to 5%|