The Difference Between Recourse and Non-Recourse Factoring (2024)

FAQs

The Difference Between Recourse and Non-Recourse Factoring? ›

Non-recourse factoring is similar to recourse factoring, but with a key difference — the factoring company assumes the risk of non-payment by the client. If the client defaults on the invoice, the business is not required to buy it back.

Recourse factoring is the most common and means that your company must buy back any invoices that the factoring company is unable to collect payment on. You are ultimately responsible for any non-payment. Non-recourse factoring means the factoring company assumes most of the risk of non-payment by your customers.

There are two types of debts: recourse and nonrecourse. A recourse debt holds the borrower personally liable. All other debt is considered nonrecourse. In general, recourse debt (loans) allows lenders to collect what is owed for the debt even after they've taken collateral (home, credit cards).

If your customers fail to pay, the invoice discounting provider can ask you to repay the advance, plus interest and fees. Recourse invoice discounting is usually cheaper and easier to access than non-recourse invoice discounting, but it also exposes you to more risk.

The lender of a non-recourse loan is only entitled to repayment from specific assets and cash flows. Limited recourse debt gives the lender a limited amount of recourse to the borrowers other assets. Non-recourse lending is common in project finance.

The main advantage of non-recourse plans is that the factoring company absorbs the loss of advance, if your customer does not pay due to a credit reason. Factoring companies use different rules to define what is a qualifying 'credit reason'.

An example of Recourse Factoring

Let us assume that company A sells ₹1000 worth of goods to Company B, which will pay company A back after three months. Now, company A sends a copy of an invoice to company C, a factoring company, which transfers ₹800 to company A on the same day.

"Without recourse" means without liability. All sales agreements entered into by a buyer and seller contain rights and responsibilities for both parties. A sale without recourse means the buyer accepts all risks associated with the purchase. This often occurs when items are sold "as is" without any guarantees.

Recourse – Higher risk for borrower (or guarantor) as personal assets beyond the collateral are at risk. Non-Recourse – Higher risk for lender as lender is limited to the collateral as its only means of recovery.

A recourse loan allows a lender to pursue additional assets when a borrower defaults on a loan if the debt's balance surpasses the collateral's value. A non-recourse loan permits the lender to seize only the collateral specified in the loan agreement, even if its value does not cover the entire debt.

What is the meaning of non-recourse? ›

Legal Definition

non-recourse. adjective. non-re·​course. ˌnän-ˈrē-ˌkȯrs, -ri-ˈkȯrs. : of, relating to, or being a debt whose satisfaction may be obtained on default only out of the particular collateral given and not out of the debtor's other assets.

In financial transactions, the words "without recourse" disclaim any liability to the subsequent holder of a financial instrument. Thus, endorsing a check and adding "without recourse" to the signature means that the endorser takes no responsibility if the check bounces for insufficient funds.

Non-Recourse Factoring: What's the Difference? With recourse factoring, you're responsible for the debt if your customers don't pay. With non-recourse factoring, the factoring company accepts the loss for nonpayment.

The central distinction between recourse and non-recourse financing is that the lender assumes the risk of default in non-recourse loans whereas the financing firm will return non-performing recourse accounts to the healthcare provider, who retains control over how the delinquent patients are handled.

Nonrecourse refers to a type of debt where the creditor may only look to the collateral to satisfy the unpaid loan, and not the debtor's personal assets (as with a recourse loan).

The primary benefit of non-recourse loans is that they provide a greater degree of protection for the borrower. Without a personal guarantee, the lender cannot seize the borrower's personal assets if they default on the loan.

Non-recourse loans are riskier for lenders, which means they are more difficult to qualify for and carry higher interest rates. Recourse loans are riskier for buyers but they offer lower interest rates.

A non-recourse loan can become a recourse loan in several situations, including: Fraud. The misapplication of funds.

In non-recourse factoring, the factor takes on the bad debt risk. It accepts specified risks around the debtor's failure to pay, but it does not insure against debts that are unpaid because of genuine disputes. Because of this, non-recourse factoring will be more expensive than recourse factoring.

Cost of Non-Recourse

There is a small additional charge for the protection that comes with non-recourse. This is called the CPE or "credit protection element" and typically starts from about 0.4% (+ VAT if applicable) of the value of invoices factored.

What is recourse factoring with example? ›

Recourse is a type of Factoring that happens when an entity has to sell the invoices to the client (factor) with the condition that the entity will purchase back any invoices that remain uncollected. It means that the factor (client) is not taking any risk of the uncollected invoices in recourse.

Thus, when a partnership liability is nonrecourse but is owed to a lender (or guarantor) affiliated with a partner, the partner affiliated with the lender (or guarantor) is treated as having 100% of the economic risk of loss and is allocated all of the liability for basis purposes.

With competitive rates and a quick cash advance process, FundThrough is our choice for the best overall factoring company. The company has been in business since 2014 and has helped thousands of small businesses meet their funding needs.

(B) Qualified nonrecourse financing For purposes of this paragraph, the term “qualified nonrecourse financing” means any financing— (i) which is borrowed by the taxpayer with respect to the activity of holding real property, (ii) which is borrowed by the taxpayer from a qualified person or represents a loan from any ...

Recourse and non-recourse factoring arrangements differ in liability to the business looking to factor receivables. Knowing the difference between these two will help shape your overall business as well as cash flow strategies.

There are 12 states that, by law, only allow nonrecourse loans. These are known as “nonrecourse states,” and they include Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington.

As you research factoring companies, you may find that non-recourse factoring companies often charge a higher rate because they are taking on more risk. Typically non-recourse factoring rates start at 2% and can go as high as 6%.