The Difference Between Recourse Factoring and Non-Recourse Factoring
The main difference between these two types of factoring is the party who is at risk for bad debt. When you understand the difference between the two, you can then make the best choice for your company.
There are numerous industries that can use invoice factoring. Essentially, any business that has invoices can take advantage of invoice factoring, which includes non-recourse and recourse factoring.
About Non-Recourse Factoring
Non-recourse factoring is when a factoring company buys your invoice and takes on the full responsibility, which means that they take the risk. If your client defaults on the invoice and doesn’t pay it back, it will be the factoring company that will take action. This is beneficial for businesses that don’t have the time, money or resources to take on the responsibility of collections. Once their invoices are sold to the factoring company through non-recourse factoring that’s it. You won’t have to worry about having to buy back the invoice from the factoring company if the invoice isn’t paid. The cash advance you receive on that invoice is 100% credit risk.
Benefits of non-recourse factoring:
- Immediate funding
- Better cash flow
- Helps you get rid of debt without taking on more debt
- Debt-free transaction
- You are not liable for paying back the cash advance if the invoice isn’t paid
About Recourse Factoring
Recourse factoring is sometimes an option that businesses choose. While it isn’t risk-free like non-recourse factoring, it generally costs less. It differs from non-recourse factoring because if the client defaults, you will have to buy the invoice back from the factoring company. If clients have delinquent invoices after 90 days or whatever the terms were is when a factoring company can charge you.
Benefits of recourse invoice factoring:
- Fast cash
- Not a loan/ no debt
- Don’t have to deal with collections
- Improves your cash flow
Conclusion: Which Type of Invoice Factoring Is Better?
There are pros and cons for each option; however if your clients are creditworthy, then the risk is minimal for either type of factoring. When choosing between the two, you will need to determine which option will be better for your company’s financial situation.
Do you want to make sure that you won’t have the risk factor of non-recourse factoring or do you want to save money and go with recourse factoring? We believe the non-recourse factoring is the best solution, as it is the less risky option for your business. It is also the more popular than recourse factoring for this reason. Yet, the bottom line is that every business’ situation is different. And the factoring you choose should ultimately cater to your specific needs.
When your business is unable to get a bank loan or is looking for ways to work its way out of debt, then invoice factoring is the best solution. Of course, if in doubt, you can always speak with a professional who will give you the best advice.