Recourse
Vs. Non Recourse Factoring
The
question asked most often about factoring is:
"What happens if my customer refuses or is
unable to pay an invoice that I have sold to my Factor?"
The answer is: It depends on what type of factoring agreement
you have in place with your Factor. The two main types are
Recourse and Non Recourse
factoring. Most factoring companies will only do one or
the other. Some factors now offer a hybrid agreement called
Modified Recourse factoring.
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Recourse
Factoring
In the event that a Debtor does not pay the invoice, recourse
factoring allows the Factor to come back to the Seller for payment.
The risk of insolvency does not transfer to the Factor when an
invoice is purchased. If a customer refuses or is unable to pay
the invoice (due to bankruptcy), you (the Seller) must buy back
the unpaid invoice or exchange it with another receivable of equal
or greater value. Since Recourse Factoring offers the least amount
of risk to the Factor, this factoring agreement offers the lowest
fees.
Modified Recourse Factoring
With modified recourse factoring the Factor carries receivables/credit
insurance and offers protection to the Seller if the customer
is unable to pay the invoice due to financial failure or bankruptcy.
However, if the customer refuses to pay the invoice from a dispute
over quality, delivery, or specifications, the Factor has recourse
back to the Sellers other receivables.
Non Recourse Factoring
With Non Recourse factoring the risk of insolvency and non-payment
is completely transferred to the Factoring company. If the customer
goes bankrupt or refuses to pay the invoice (for whatever reason),
the Factor cannot come back to the Seller for payment.
This method of factoring carries more risk for the factoring company
and therefore factoring fees are higher.
Which One is Better?
As the seller, if you are comfortable with the account debtor's
(your customer) ability and willingness to pay the invoices, recourse
factoring is better due to the lower factoring fees incured (the
discount rate). Non Recourse factoring is favorable when minimal
risk is more important than higher factoring fees, such as with
larger invoices or customers who's financial status is questionable.
Most factoring companies only offer Recourse Factoring and do
not offer Non Recourse as an option.
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