What is Non-Recourse Factoring?
If you are seeking to obtain capital for your business by factoring receivables, you have two options to choose from: non-recourse and recourse factoring. Both choices have their benefits and drawbacks so it’s important to familiarize yourself with each of them before deciding which works best for you and your business.
In all factoring transactions, the invoice factoring company advances 80-90 percent of the total value of the invoice to you, the small business owner, within 2-5 business days. With non recourse financing, the invoice factoring company takes full accountability and ownership of the receivables and receivables collection process.
That means it purchases the invoices outright and takes complete responsibility for their full collection. In this way, the invoice factoring company is completely responsible for collecting the debt from the client. (The client is referred to as the debtor.)
Your Costs May Take Invoice Risk and Obligations Into Account.
With the non recourse option, once the financing has been advanced to you, the small business owner, it is yours to keep even if the debtor fails to meet its financial obligation. That is, with non recourse, you get to keep the capital advanced from the invoice even if the debtor never pays the invoice.
In this situation, the accounts receivables financing company assumes the debit and writes it off; it is a part of the cost of doing business. The small business does not have to pay back the money it was advanced. The financing company takes on the loss from the debtor not paying the invoice.
Recourse Factoring Is Riskier For You, but Less Expensive
With the recourse option for factoring, the opposite is true. A company that offers recourse factoring does not take on full accountability for the invoice or the debt the invoice represents. That is, if the debt goes unpaid by the client (aka debtor), the small business owner is obligated to pay back the money it was advanced. In addition, the small business owner will have to go after the client to collect the original debt. This can create both a financial and administrative burden to the small business owner.
With the non recourse route, the accounts receivables financing company takes full responsibility for the debt and therefore takes on all the risk should the debt go uncollected. With recourse factoring, the financing company only takes partial responsibility for the debt. In this way, it takes on some but not all of the risk should the debt go uncollected.
The full and partial risk levels make up for the difference in cost between recourse and non recourse services. As such, recourse services cost less than non recourse factoring services.
Some Factoring Companies Only Offer One Option
So now that we know the difference between the two financing choices, let’s discuss the accounts receivables financing companies that offer them. Because there’s a greater risk involved with the non-recourse option, financing companies that offer this service tend to be more established, have greater financial backing and capital, and are more likely to be veterans in the industry. They can also be part of a larger financial conglomerate that offers more diverse and expansive commercial financing options.
Non Recourse Factoring Requires Robust Capital Resources
Frequently, when an accounts receivables financing company first starts out, it lacks the financial capital and resources to offer the higher risk non recourse option. As a result many newbie financing companies only offer the recourse option. For this reason, you will find that recourse financing is the more commonly offered type of factoring service.
As a small business owner, you can save money using recourse as it generally has lower rates than non recourse. For instance, if you are a supplier and have a long term corporate client that always pays its bills on time, you can reduce your total factoring expenses by choosing recourse financing.
Conversely, if you just start doing business with a new client and you’re not sure about their reliability and their commitment to paying their bills on time, you can provide an extra layer of security for yourself by choosing the factor that offers the choice of non recourse.
Freight Factoring Companies Tend to Offer Non Recourse Financing
Transportation and trucking businesses that use freight factoring companies more often than not choose the non recourse option. That’s because new companies pop up all the time and those in trucking want to make sure their freight bill or invoice payment is guaranteed.
Nonpayment can be somewhat more common in the industry. As a result, freight and transportation companies want to protect themselves by partnering with a freight bill factoring company that can protect them should the client fail to pay its debt.
To find a Non Recourse factoring company, reach out and our representatives can help you find the right provider for your specific needs.