Recourse Vs. Non-Recourse Invoice Factoring
If you have ever looked at invoice financing (often called factoring), you likely have seen the terms “recourse” and “non-recourse.” This leaves a lot of people wondering what those terms mean and which one is better. Below is a little information to help clear up this confusion and help you make better choices for your business’s financing needs.
How Invoice Financing Works
When you finance your receivables, you are selling them or taking a loan out against them. In either case, the invoices are being treated as an asset that will have a future cash value. This is a great way to get some immediate funding for your business, especially if you have significant receivables.
The lending company also called the factor, collects payment from your customer. Typically, you pay the factor by discounting the value of the invoice some amount.
Many business teams like to use this type of financing to smooth out their cash flow. However, it begs the question: what happens if the customer never pays?
Recourse and Non-Recourse
That question defines the key difference between the two types of invoice financing. As the name implies, recourse financing gives the factor the right to demand compensation if the customer never pays up. In other words, the lending company has a recourse to collect payment from you instead.
Conversely, non-recourse means that the factor does not have that right. The lender is assuming the risk of non-payment in this case.
Of course, the factor can apply pressure and attempt to collect from the customer. In most cases, this will result in payment and everyone ends the day happy (other than the customer, perhaps). However, if the customer declares bankruptcy to receive protection, the factor may be out of luck.
Which Is Better?
At first glance, the non-recourse option seems like the obvious choice for you as the borrower. However, this may not be the case.
It is true that you carry less risk in that arrangement. Don’t expect that reduced risk to come freely, however. In a lot of cases, you need to offer the factor a deeper discount on your invoices to have non-recourse. If you don’t expect there to be issues of non-payment, you may benefit from choosing a recourse option. However, there is no denying the benefits of skipping the risk entirely.
The best thing you can do is run the numbers to determine which one is right for your company. Evaluate the expected discount against the anticipated risk. Learn more about factoring today and see whether recourse or non-recourse is right for you.