This week, we will look at recourse vs non-recourse factoring.
Between recourse and non-recourse factoring, most companies will either offer one type or the other, but recently companies have been offering something called modified recourse factoring, which has elements of both.
In recourse factoring, if you sell an invoice to a Factoring Company and the Debtor of that invoice cannot or will not pay it, the Factoring Company can collect payment from you, the seller.
The risk of insolvency is not transferred to the Factoring Company when it purchases the invoice. So, if the Debtor goes bankrupt, the Seller must buy back the unpaid invoice or exchange it for a different receivable of equal or greater value.
Because recourse factoring involves the least amount of risk for the Factoring Company, the fees involved with this type of factoring will generally be lower.
With non-recourse factoring, the risk of insolvency and non-payment is transferred to the Factoring Company, meaning if the Debtor goes bankrupt or refuses to pay the invoice for any reason, the Factoring Company cannot come back to the Seller to collect payment.
Because this type of factoring carries considerably more risk for the Factoring Company, the fees associated with it are usually higher.
Modified Recourse Factoring
With this type of factoring, the Factoring Company will have receivables/credit insurance and can offer protection to the Seller if the Debtor is unable to pay the invoice due to going bankrupt. However, if the Debtor refuses to pay for some other reason, like quality, delivery or specifications, the Factoring Company can then go back to the Seller to buy back the invoice or exchange it for a different one.
Which way is better?
Which type of factoring is better will depend on how much confidence you have in your clients’ ability and willingness to pay invoices. If you’re confident that there will be no trouble collecting from debtors, then recourse factoring is better because of the lower fees.
Non-recourse factoring would be preferable when you favor minimal risk over larger fees, such as with larger invoices and when Debtors have questionable financial stability.
Many Factoring Companies will only offer recourse factoring without offering non-recourse factoring as an option.
[Photo courtesy of Andy on Flickr]