What is Non-Recourse Factoring?
There are two basic types of receivables financing: non-recourse factoring and full recourse invoice factoring. With both types of receivables financing, there are three parties directly involved:
- An organization that invoices its customers for payment (the “client”)
- The customer responsible for paying the invoice (the “debtor”)
- A receivables financing company that factors the invoice (the “factor”)
With non-recourse factoring, a factoring company assumes the credit risk for invoices they factor, or purchase, from the factoring client. If a customer (or debtor) is unable to pay due to insolvency, the non-recourse factoring company absorbs the loss, not the client. With non-recourse factoring, clients rarely have to buy back an invoice. Generally this would only occur in the case of customer dispute; such as, the customer did not receive the shipment, refused delivery or returned it.
Full recourse factoring (or factoring with recourse) leaves the client responsible for the credit worthiness of its debtors. The factoring client may be required to buy the invoice back if their customer (the debtor) is unable to pay for any reason or fails to remit payment within a specified time period.