Recourse versus Non-Recourse

Unfortunately, businesses do fall on hard times and the companies your business deals with may be no exception. What happens if the company invoiced is unable to make payment on the invoice in question? The answer depends on the terms and conditions of the factoring line. It's a difficult situation to deal with, but one which must be addressed early on in the factoring relationship. This will help avoid nasty surprises if and when the situation arises for your company.

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Recourse factoring allows the factoring agent to come back to the client company for payments should the invoice go unpaid. This can come as quite a shock to the client company if this situation is unforeseen. The client company must then pay back the funding or submit another invoice of equal or greater value. This type of funding holds the least amount of risk for the factoring agent thereby reducing the amount of fees charged.

Non-Recourse transactions transfer the entire amount of solvency directly to the factoring agent. Should the invoice go unpaid, the factoring agent cannot come back to the client company for payment for any reason. The risk for this type of factoring is the greatest for the factoring agent causing the fees to be at their highest level.

A third option has emerged to the recourse dilemma. This is the option of Modified recourse factoring. With this option the client company purchases insurance which covers all parties should the invoice go unpaid. In the event of the invoiced company filing for bankruptcy, the insurance would cover the amount of the funding.

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Choosing which factoring recourse option is best for you depends greatly on your individual situation. If you feel very confident in your clients ability to repay the invoice, then there may be little question of recourse in your mind. If however, you are unsure of your client and their ability to pay timely or at all, you may want to consider your options. Many factoring companies do not offer non-recourse factoring so shop around for the company which offers the best value for your particular situation.