Question 1

What is recourse factoring?

Accepted Answer

Recourse factoring is a factoring arrangement where the business retains the risk of customer non-payment. If your customer fails to pay the factored invoice within an agreed timeframe (usually 60-120 days past the invoice due date), you must buy back the unpaid invoice or replace it with a performing invoice of equal value. Recourse factoring is the most common type, accounting for approximately 75-80% of all factoring contracts in the United States.

Question 2

What is non-recourse factoring?

Accepted Answer

Non-recourse factoring is a factoring arrangement where the factoring company assumes the credit risk of customer non-payment. If your customer cannot pay due to insolvency, bankruptcy, or protracted default, the factor absorbs the loss. However, non-recourse protection typically only covers commercial credit risk — it does not cover invoice disputes, fraud, or delivery issues. Non-recourse factoring costs 0.5% to 2% more than recourse factoring.

Question 3

Which type of factoring is more common?

Accepted Answer

Recourse factoring is significantly more common, representing approximately 75-80% of all factoring contracts. This is because recourse factoring is less expensive (lower fees), easier to qualify for, offers higher advance rates, and works with a wider range of customer credit profiles. Most small businesses start with recourse factoring and may transition to non-recourse as their volume grows and they want additional protection.

Question 4

How much more does non-recourse factoring cost?

Accepted Answer

Non-recourse factoring typically costs 0.5% to 2% more per invoice than recourse factoring. If recourse factoring is priced at 2% per 30 days, non-recourse on the same invoices might cost 2.5% to 4%. The premium reflects the additional credit risk the factor assumes. Advance rates may also be slightly lower with non-recourse (80-90% vs 85-95%) because the factor needs a larger reserve to cushion potential losses.

Question 5

Does non-recourse factoring protect against all types of non-payment?

Accepted Answer

No — this is one of the most important and misunderstood aspects of non-recourse factoring. Non-recourse protection typically only covers commercial credit risk, meaning your customer's inability to pay due to insolvency or bankruptcy. It does NOT cover: invoice disputes, product returns or warranty claims, fraud, delivery shortages, customer dissatisfaction, or voluntary refusal to pay. If a customer simply decides not to pay due to a dispute, you're still responsible for that invoice even under a non-recourse agreement.

Question 6

What happens when a customer doesn't pay under recourse factoring?

Accepted Answer

When a customer doesn't pay under recourse factoring, the factor typically follows a defined process: they attempt collections for 60-120 days past the invoice due date (the 'recourse period'), notify you that the invoice is approaching recourse, then charge back the advance to your reserve account or require you to buy back the unpaid invoice. Many factors allow you to replace the unpaid invoice with a new performing invoice of equal or greater value rather than returning cash.

Question 7

Can I have both recourse and non-recourse invoices in the same account?

Accepted Answer

Yes, many factoring companies offer hybrid arrangements where certain customer accounts are factored on a non-recourse basis while others are recourse. This is common when some of your customers are large, well-established companies (where non-recourse protection is inexpensive because the risk is low) and others are smaller, less-established businesses (where recourse factoring is more appropriate due to higher credit uncertainty).

Question 8

How do I decide between recourse and non-recourse factoring?

Accepted Answer

Consider these factors: your tolerance for bad debt risk (if losing one large invoice payment would seriously harm your business, non-recourse provides critical protection), the creditworthiness of your customers (if they're Fortune 500 companies, recourse is fine since default risk is near zero), your profit margins (if margins are thin, non-recourse protects against devastating losses), and the cost difference (if non-recourse adds 1% to every invoice, calculate whether that insurance premium is worth the protection).

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