Recourse vs Non-Recourse Factoring Explained

When shopping for invoice factoring, you'll quickly encounter two fundamental types of arrangements: recourse factoring and non-recourse factoring. The difference affects your risk exposure and the fees you'll pay.

What Is Recourse Factoring?

Recourse factoring is the most common type. If your customer fails to pay within a specified timeframe (typically 90 days), you must buy back that invoice from the factoring company. Because the factor retains less risk, fees are lower—typically 1% to 3% per month.

What Is Non-Recourse Factoring?

Non-recourse factoring shifts credit risk to the factoring company. If your customer becomes insolvent or bankrupt, the factor absorbs the loss. However, most non-recourse arrangements only protect against true insolvency—not payment disputes or refusals to pay. Fees are higher: 2% to 5% per month.

Reading the Fine Print

Before signing, always ask: What events trigger non-recourse protection? Are disputes excluded? What is the process for claiming protection?

The Practical Reality

For most businesses with established, creditworthy customers, recourse factoring offers the best combination of cost and simplicity. The lower fees more than compensate for the residual risk—especially when factors provide free credit checks to screen customers.

Non-recourse factoring is worth considering if you operate in an industry with high customer turnover, you're expanding into new markets with unfamiliar customers, or you want to completely offload credit risk.