Invoice factoring is great for any business. In fact, it's one of the best cash flow solutions out there. You get to increase your cash flow, so you don't have to worry about operating expenses, payroll, and even business expansion. 

On the downside, we all have that one customer, you know, the one who delays paying their invoice, and in some cases, outright refuses to pay their dues. So, what happens in such a case? Who bears that financial burden? 

The outcome of this situation all comes down to the agreement you have with your factoring company. Like everything else in life, you get two choices; recourse and non-recourse factoring. So, what's their difference? Let's check it out.

Recourse Factoring 

Recourse factoring works as an agreement between you and the factoring company. You are expected to buy back the unpaid receivables from the factoring company in case of a non-payment. In this case, you bear all the credit risk.

One of the most attractive attributes of recourse factoring is that you can get funding regardless of your creditworthiness. This is because the factoring company protects itself through a contract that stipulates that the business (you) will bear the responsibility for any unpaid invoices.

This makes recourse factoring very popular among factoring companies since they don't bear any financial risks due to unpaid invoices. Heck, even the responsibility of dealing with the defaulting customer (either legally or through collection agencies) falls into your hands.

That being said, with recourse factoring, you get to enjoy less factoring fees and more flexibility on advance rates. So, when dealing with recourse factoring, you trade price to risk. If you have faithful customers, this might just be the best way to go.

Non-Recourse Factoring 

In non-recourse factoring, you get into an agreement with the factoring company whereby the factoring company bears all financial obligations pertaining to the unpaid receivables. In this case, your business remains unaffected by the unpaid receivables.

With recourse factoring, your financial benefits are literally two-fold. You get to solve your cash flow problems without any credit risk. This form of factoring also works like credit insurance in that you get access to your money on time and at no risk. On the downside, non-recourse factoring is synonymous with higher factoring fees. 

Which Factoring Type Will Work Best for My Business?

Like any other financial transaction out there, both recourse and non-recourse factoring come with distinct advantages and disadvantages. 

Benefits of Recourse Factoring

• Faster approval process

• More returns for invoices

• In most cases, the factoring company performs a credit check on your clients to minimize the risk of defaults.

• More affordable compared to non-recourse factoring

Drawbacks of Recourse Factoring

• The factoring company has the right to demand payment from you if your customer defaults.

• You essentially put your business's income and bank accounts at risk of being garnished. In case of non-payment, you have two options; you can either give the factoring company an invoice of equal value or pay back the invoice amount.

Benefits of Non-Recourse Factoring

• Better debt protection

• All liabilities of unpaid invoices are transferred to the invoice factoring company.

• No additional debts

• You remain protected if your customer goes bankrupt.

Drawbacks of Non-Recourse Factoring

• Not all factoring companies offer non-recourse factoring

• Not the best choice of your clients have a bad credit rating

Ready To Get Started?

Both recourse and non-recourse factoring can help boost cash flow in your business. And now that you know the difference between the two, you're better equipped to make an informed decision on which type to go for. Apply now and get faster cash flow with the best invoice factoring solutions.