If you have started talking to factoring companies, you are probably becoming familiar with the terms Recourse and Non-Recourse and depending on who’s pitch you are hearing one is the greatest form of factoring ever and the other one is well, the other one. So how do you know which one is the best for you? The answer is not as complicated as you would think. In my career I have worked for both and have seen the benefits and flaws of each, and since I am not promoting one over the other this will be a very candid view. There is often a misconception that in non-recourse you sell your invoices and done. This is not all together true, only in regards to credit, if the invoice is deputed by your client it will fall back on you in either form of factoring. What is the biggest difference? It’s how the factoring company looks at your customer’s credit. All factoring company pull credit on your customers. The report shows that the low credit limit is $25,000 average is $50,000 and High is $75,000. A non-recourse funder and a recourse funder will approach this in very different ways, and their approach will directly affect your business.
Recourse factoring is where you as the seller of the invoice, guarantee that the invoice is going to get paid if it doesn’t you are going to pay the factoring company the amount owed on the invoice or invoices with that customer. When the Factoring Company pulls credit on the client they are going to maximize the amount of credit that they can safely extend because in full recourse you take the responsibility but they are not going to set you up to fail and they will monitor the credit on a regular base to make sure that nothing changes. By you taking on the credit risk they are also going to be able give you a better rate because they don’t have to build in a cushion for any future write offs. The risk is that if your customer doesn’t pay because of in ability it falls on you. In 2009 I saw this crush a company that did most of its business with one large client that declared bankruptcy, but that is an exception not the norm.
Non-Recourse Factoring takes on the credit risk so when the factoring company pulls credit they are typically setting the limit on the low end, and over time may increase to the average but will very rarely go to the high. The approach is great for a company that does not want to take risks and have high concentrations with a handful of customers. A company will pay a bit more but if your client can’t pay the invoice because of fiscal insolvency or bankruptcy you are not responsible for the money and may sleep a bit better at night knowing this. The risk is that your client has to go into bankruptcy or be willing to provide financial proving fiscal insolvency, and you will pay a bit more for the good night sleep. I once knew a company that was willing to pay almost $20,000 more a quarter in order to prevent themselves having to eat about $3,000 in charge backs. On the flip side the client I referred to in the recourse example would have come out just fine.
The reality is that one is not better than the other in all situation which is why they both exist. It all breaks down to what is going to work best for your company. Companies make the mistake of trying to compare the fees without understanding the differences. When the reality is that it’s not an apple to apple comparison. So the pricing between these products will typically look different but there are other things that will affect the price as well that you should also consider