Recourse Factoring
Who bears credit risk: You (the business owner)
What happens if customer doesn't pay: You must buy back the invoice from the factor
Typical fees: 1%–3% per month (lower)
Advance rates: Generally higher (85–95%)
Best for: Businesses with established, reliable customers
Market prevalence: Most common arrangement (80%+ of factoring contracts)
Non-Recourse Factoring
Who bears credit risk: The factoring company
What happens if customer doesn't pay: Factor absorbs the loss (credit default only)
Typical fees: 2%–5% per month (higher)
Advance rates: Often slightly lower (80–90%)
Best for: Businesses in volatile industries or with newer customers
Market prevalence: Less common; often misunderstood
Understanding Recourse Factoring in Depth
Recourse factoring is the industry standard. In this arrangement, you sell your invoices to the factoring company but retain what's called "credit recourse"—meaning if your customer fails to pay within a specified window (typically 90 days past due), you must return the advance to the factor or replace it with another invoice of equal value.
Despite this liability, recourse factoring is the preferred choice for most businesses because:
- Fees are meaningfully lower, preserving more of your invoice value
- Most businesses with established customers rarely experience non-payment
- Many factors provide free credit checks on your customers, reducing the risk that you'll accept invoices from poor payers
- The factor still handles collections, even in a recourse arrangement—you're only liable if collections ultimately fail
Understanding Non-Recourse Factoring in Depth
Non-recourse factoring shifts the credit risk to the factor—but with important limitations that are frequently misunderstood. The critical fine print: most non-recourse agreements only protect you against your customer's insolvency (bankruptcy or verified inability to pay). They do not protect against:
- Customer disputes about the quality of goods or services delivered
- Customer claims that the invoice is incorrect or unauthorized
- Customer refusals to pay for reasons other than true insolvency
In practice, when a customer doesn't pay, it's usually because of a dispute—not because they've gone bankrupt. This means non-recourse protection is invoked less frequently than business owners expect when they purchase it.
Which Should You Choose?
For most established businesses with reliable B2B customers, recourse factoring offers the best value. The lower fees and higher advance rates generally outweigh the residual risk—especially when you use your factor's credit monitoring tools to screen customers before accepting orders.
Non-recourse factoring may be worth the premium if you're expanding into new industries with unfamiliar buyers, if your existing customers operate in volatile sectors, or if you want maximum protection and the peace of mind is worth the additional fee.
Frequently Asked Questions
Can I switch from recourse to non-recourse factoring later?
Yes—many factoring agreements allow you to adjust your structure as your business evolves. You can also maintain different arrangements for different customers or invoice types.
Does non-recourse factoring mean I never have to buy back an invoice?
Not exactly. You won't have to buy back an invoice if your customer becomes insolvent. But if a customer disputes the invoice or refuses to pay for other reasons, you may still be responsible in most non-recourse arrangements.
Is non-recourse factoring worth the higher cost?
It depends on your customer base. If you're regularly dealing with newer or financially stressed customers, the additional protection may be cost-effective. For established customer relationships, recourse factoring with good credit screening is usually the better value.