When you factor invoices, one of the most important decisions you'll make is choosing between recourse and non-recourse factoring. This choice determines who bears the risk if your customer fails to pay an invoice. While both types of factoring provide immediate cash flow, they differ significantly in terms of risk, cost, and protection.
Quick Comparison
Recourse Factoring
You assume the credit risk
- Lower fees (1-3%)
- More widely available
- You buy back unpaid invoices
Non-Recourse
Factor assumes the credit risk
- Protected from non-payment
- Peace of mind
- Higher fees (3-6%)
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Recourse Factoring Explained
Recourse factoring is the most common type of invoice factoring, accounting for approximately 90% of all factoring arrangements. With recourse factoring, you (the business) retain the credit risk for your invoices.
How It Works
Here's what happens with recourse factoring:
- You factor an invoice and receive your advance (typically 80-95%)
- Your customer has a set period (usually 60-90 days) to pay the invoice
- If your customer pays on time, you receive the reserve minus the factoring fee
- If your customer fails to pay within the agreed period, you must buy back the invoice or replace it with a performing invoice
Advantages of Recourse Factoring
Lower Fees
Typically 1-3% per invoice, significantly less than non-recourse options
Easier Approval
More factoring companies offer recourse factoring with less stringent requirements
More Flexibility
Factors are more willing to work with diverse customer bases
Cost Effective
Best value if you have reliable customers with good payment history
Disadvantages of Recourse Factoring
Credit Risk Remains With You
If your customer doesn't pay, you must repurchase the invoice, creating potential cash flow issues
Uncertainty
You bear the financial impact of customer bankruptcies, disputes, or slow payments
Collections Involvement
While the factor handles initial collections, you may need to get involved if payment issues arise
Non-Recourse Factoring Explained
Non-recourse factoring transfers the credit risk from you to the factoring company. If your customer fails to pay due to insolvency or bankruptcy, the factor absorbs the loss—not you.
How It Works
Here's what happens with non-recourse factoring:
- You factor an invoice and receive your advance (typically 75-90%)
- The factoring company assumes responsibility for collecting payment
- If your customer pays, you receive the reserve minus the factoring fee
- If your customer becomes insolvent or bankrupt and cannot pay, the factor absorbs the loss
Important Limitation
Non-recourse protection typically only covers customer insolvency or bankruptcy. It does NOT cover:
- Customer disputes over work quality or deliverables
- Customer simply refusing to pay (without bankruptcy)
- Returns or claims of incomplete work
- Slow payment or customer cash flow issues
Advantages of Non-Recourse Factoring
Credit Protection
Protected from losses due to customer bankruptcy or insolvency
Peace of Mind
Sleep better knowing you won't have to buy back bad debt
Predictable Cash Flow
No surprise buybacks disrupting your working capital
Risk Management
Ideal when working with financially uncertain customers or new markets
Disadvantages of Non-Recourse Factoring
Higher Fees
Typically 3-6% per invoice, double or triple the cost of recourse factoring
Stricter Requirements
Factors carefully vet your customers and may decline to factor certain invoices
Limited Protection
Only covers insolvency/bankruptcy, not disputes or other payment issues
Less Availability
Fewer factoring companies offer non-recourse options
Side-by-Side Comparison
| Feature | Recourse Factoring | Non-Recourse Factoring |
|---|---|---|
| Who Bears Credit Risk? | Your business | Factoring company |
| Typical Fee Range | 1-3% per invoice | 3-6% per invoice |
| Advance Rate | 80-95% | 75-90% |
| If Customer Goes Bankrupt | You buy back invoice | Factor absorbs loss |
| If Customer Disputes Invoice | You buy back invoice | You buy back invoice |
| Customer Approval Process | Moderate vetting | Extensive vetting |
| Market Availability | ~90% of factors offer | ~40% of factors offer |
| Best For | Established customers, lower risk | New customers, higher risk industries |
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Which Option Should You Choose?
Choose Recourse Factoring If:
- Your customers have strong credit and payment history
- You're working with established companies unlikely to go bankrupt
- You want to minimize factoring costs
- You have reserves to buy back an invoice if necessary
- You rarely experience payment disputes
Choose Non-Recourse Factoring If:
- You're working with new or unknown customers
- Your industry has higher bankruptcy rates
- You want maximum protection from bad debt
- Cash flow stability is more important than minimizing fees
- You can't afford the cash flow disruption of buying back invoices
Hybrid Approach
Many businesses use a combination of both. You might choose recourse factoring for invoices to established customers with proven payment records, and non-recourse factoring for newer customers or those in financially volatile industries. This allows you to balance cost savings with risk management.
Real-World Scenarios
Scenario 1: Staffing Agency (Recourse Makes Sense)
Situation: A staffing agency works with 15 corporate clients, all Fortune 500 companies with excellent credit ratings. They've never had a non-payment in 5 years.
Choice: Recourse factoring at 2.5% fee
Why: The risk of a Fortune 500 company going bankrupt is extremely low. Paying an extra 2-3% for non-recourse protection doesn't make financial sense. On $1M in monthly invoices, they save $25,000-$30,000 annually by choosing recourse.
Scenario 2: Construction Subcontractor (Non-Recourse Preferred)
Situation: A subcontractor works with various general contractors, some new relationships. The construction industry has higher bankruptcy rates, especially during economic downturns.
Choice: Non-recourse factoring at 4.5% fee
Why: Construction has higher bankruptcy risk. One $100K unpaid invoice could devastate their business. The 2% premium for non-recourse protection provides essential insurance against this risk.
Scenario 3: Wholesale Distributor (Hybrid Approach)
Situation: A distributor has 50 customers—30 are established accounts with 5+ year relationships, 20 are newer accounts acquired in the past year.
Choice: Recourse for established accounts (2%), non-recourse for new accounts (5%)
Why: This hybrid approach minimizes fees on low-risk invoices while protecting against the higher risk of newer customer relationships. It's the best of both worlds.
Related Resources
What is Invoice Factoring?
Complete guide to understanding how invoice factoring works
Read MoreWhat If Customer Doesn't Pay?
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Read MoreHow Much Does Factoring Cost?
Detailed breakdown of fees and what affects your factoring rate
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