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Non-Recourse Factoring

Non-recourse factoring entails selling invoices at a discount to a factoring company, which is a type of financing company that specializes in these transactions. It provides the seller with the following:
  • Transfer of total commercial credit risk
  • No chargeback (no recourse) if the invoices are not paid
  • Credit insurance at a fraction of the price

What is factoring?

Factoring accounts receivables (also called invoice factoring) is a way to get working capital by selling pending invoices to a factor, which is a type of financing company that specializes in these transactions. It does not involve taking on debt or diluting equity.

By using factoring – which can monetize invoices in 24 to 48 hours – companies can obtain funds to fuel growth, invest in new projects, hire more staff, buy supplies in bulk, and/or stabilize cash flow. To see why factoring is a good alternative for your business, please check out “Why does your business need factoring?” section on our Invoice Factoring page.

Factors typically charge 1% to 5% discount rate for their services. For additional information on factoring fee structure, please see our Asset-based Lending page.

Some of the largest consumer factoring companies in the world include credit card companies, such as Visa and Mastercard. At the same time, commercial clients are served by specialized factoring companies and banks.

Unlike bank financing, factoring does not take into account the company’s creditworthiness. Instead, it relies on the credit history of the company’s clients who are responsible for paying the invoices. As such, it is a better-suited alternative for business-to-business (B2B) companies that tend to have a lower risk profile than business-to-consumer (B2C) companies. Companies in all stages of growth – including startups – and across a wide range of industries are good candidates for factoring as long as they have creditworthy clients and terms longer than 30 days.

Some of the industries in which factoring is commonly used include the following:

  • Information Technology
  • Freight & Transportation
  • Government Contracting
  • Manufacturing
  • Agriculture
  • Oil and Gas
  • Payroll & Staffing
  • Telecommunications

Non-recourse vs. recourse factoring

Factoring can take one of the two forms. In a non-recourse factoring scenario, the factor buys the invoice from its client and becomes responsible for its collection. Conversely, in a recourse factoring situation, the factor lends its client against a pending invoice. If the invoice is not paid within a specified time period, the client has to replace it with a new, creditworthy one or pay back the factor.

Here are some additional differences between the two types.

  • Risk level. A non-recourse factoring arrangement eliminates risk of non-collection. By comparison, recourse factoring implies a shared risk burden between the factor and it client. A factor would always run a credit check on the client’s customer – also known as account debtor – to minimize the risk of non-payment. Factor would not purchase a defaulted invoice.
  • Fees. Because of the lower level of risk, recourse factoring might feature lower fees. However, fees would also vary depending on the type of industry the client is in, the credit profile of its customers, dollar amount and the number of invoices that are being factored, etc.
  • Benefits. non-recourse factoring acts as credit insurance for your business. This type of insurance is usually only available to large businesses with more than $10 million of revenue and covers the cost of receivables that go bad. non-recourse factoring is available to your small or medium-sized business at a fraction of the cost. Depending on the agreement, the arrangement can be valid, even if your client files for bankruptcy.
  • Commonality. Around 90% of factoring companies only offer recourse factoring. Business Factors & Finance offers non-recourse factoring alleviating any potential headaches associated with invoice collection. We also offer accounts receivable management services, eliminating or reducing the need for back-office staff.

Case study: trucking company in need of cash

Let’s examine the case of a trucking company that successfully used non-recourse factoring to alleviate cash flow problems while experiencing rapid growth due to the shale oil boom in Texas. In order to meet the demand for its services, the company needed to hire specialized water hauling trucks and man them for 12 hours a day. But its clients took more than 60 days to pay and it was having trouble keeping up with the demand for its services.

The company turned to factoring and secured a $1 million line of credit at a 2% discount rate allowing it to add 30 trucks to its fleet and pay for the necessary fuel. Below is a table showing the benefit of factoring.

Factor accounts receivable Do nothing
Potential gross profit $2,000,000 $0
Less cost of factoring $40,000 $0
Net earnings $1,960,000 $0

Fees vary by factoring company, type of arrangement, industry the client is in, their clients’ creditworthiness, the number and dollar amount of invoices that are being factored.

Here is an additional example.

  • Invoice amount: $10,000
  • Advance rate: 95%
  • Industry: staffing
  • Reserve: $500
  • Fees: Monthly fee of 2%, capped at the amount of the reserve
  • Other fees: $100 lockbox fee, capped at the amount of the reserve.
  • Type of arrangement: non-recourse

In this scenario, the client pays $300 ($100 for the use of lockbox plus the discount rate of 2%) for the factoring service until the factor collects on the invoice. If a factor is unable to do so, there is no additional charge to the client. The fee comes out of the reserve. If the invoice is still outstanding after 2.5 months, there are no additional fees to the client. The advance rate is set at 95% due to the industry the client is in.- There is little chance that this invoice will be challenged. If the client is in retail industry, the advance rate might be lower.

Five things to look for in a factoring company

When a company looks to work with a factor, the following are five common things that are sought and valued:

  • Experience in the factoring market and your industry. When selecting a factoring company, try to look for one that has been around for a longer period of time and has experience working with businesses in your industry. While factoring is a fairly standard process, experience in your industry helps the factor understand the nuances peculiar to your business. Being in business for a long period of time minimizes the possibility of any hiccups.
  • Quality of customer service. Exceptional customer service is important for you as a business owner and your clients that the factoring company might potentially deal with directly if it becomes responsible for invoice collection.
  • Transparency. Factoring companies should offer online account access and a detailed breakdown of fees that your business is charged. Some factors will require you to enter into a long-term arrangement and will charge you a prepayment penalty if you decide to terminate the arrangement early. Some will require monthly minimums and charge startup, due diligence, lockbox, ACH and wire fees. All factors will charge a discount rate of 1% to 5% per a specified time period for monetizing your invoice.
  • Type of factoring offered. As described above, non-recourse factoring might be advantageous for businesses looking for insure their invoices against the risk of non-payment. This type of factoring might feature slightly higher fees because of the associated risk.

Business Factors & Finance has been around for close to 20 years and has worked with business owners across various industries, including agriculture, freight and logistics, manufacturing and oil and gas. We provide small business factoring services on a non-recourse basis, don’t require monthly commitments or minimums and work with even the most challenging credits.


Factoring can be an attractive alternative when a company needs cash to fund its ongoing business or fuel growth. It comes in the form of recourse and non-recourse factoring. In a non-recourse factoring scenario, the factor buys the invoice from its client and becomes responsible for its collection. Conversely, in a recourse factoring situation, the factor lends its client against a pending invoice. If the invoice is not paid within a specified time period, the client has to replace it with a new, creditworthy one or pay back the factor. non-recourse factoring is akin to credit insurance – protecting businesses from the risk of receivables non-payment at a fraction of the cost. It transfers the credit risk from the business to a factor and may still be valid even if the counterparty files for bankruptcy. Because of that, it might feature slightly higher fees. However, fees also depend on the client’s industry, their counterparty creditworthiness and the dollar amount and the number of invoices being factored, among other things. Business Factors works with you to evaluate your particular situation and structure an arrangement that’s best for your business.

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Learn all of the ways your business can more easily grow and prosper by partnering with Business Factors & Finance. Call: 800-672-3844