Recourse vs. 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.
Randa Kriss
By Randa Kriss 
Updated
Edited by Christine Aebischer

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.

Factoring, also known as invoice factoring or accounts receivable factoring, is when a business owner sells their outstanding invoices to a factoring company at a discount. The factoring company pays the business owner a percentage of the invoice amount up front and then takes responsibility for collecting repayment from the business’s customers. Factoring is a way for business owners to get capital without having to take out a small-business loan.

There are two types of invoice factoring — recourse and non-recourse factoring — which differ in several ways, including typical fees, qualification requirements and which party is responsible for nonpayment.

Here’s what you need to know about recourse factoring and non-recourse factoring.

How much do you need?

with Fundera by NerdWallet

We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

What is recourse factoring?

Recourse factoring is the most common type of invoice factoring. With a recourse factoring agreement, you are ultimately held responsible for the debt if your customers fail to pay.

The factoring company should make every effort to collect repayment on your behalf. However, if unsuccessful, it can demand compensation from you. In this case, you are required to buy back that invoice from the factoring company — in other words, repay the funds it is currently owed — and attempt to collect the debt from customers yourself.

You ultimately accept the loss if you cannot collect from your customers. Therefore, with recourse factoring, you, the borrower, assume more of the risk associated with possible nonpayment.

Advertisement
Bluevine - Line of credit
OnDeck - Online term loan
Funding Circle - Online term loan
NerdWallet rating 

5.0

/5
NerdWallet rating 

5.0

/5
NerdWallet rating 

4.5

/5

Est. APR 

20.00-50.00%

Est. APR 

35.40-99.90%

Est. APR 

15.22-45.00%

Min. credit score 

625

Min. credit score 

625

Min. credit score 

660

What is non-recourse factoring?

Non-recourse factoring, on the other hand, means the factoring company assumes most of the risk of nonpayment by your customers. With a non-recourse factoring agreement, the factoring company is ultimately responsible for all attempts to collect payment from your customers, and if your customers don’t repay, the factoring company accepts that loss.

However, some non-recourse factoring agreements only cover specific situations. In this case, you may still be responsible for the debt if your customer doesn’t pay. For example, a factoring company might limit non-recourse to customer businesses that have closed or declared bankruptcy, thus holding you, the borrower, liable for any outstanding debt.

Because non-recourse factoring is riskier for the factoring company, it’s less common than recourse factoring. If a company does offer non-recourse factoring, you’ll typically need to show that your customers have consistent records of on-time payments and strong credit histories to qualify.

Non-recourse factoring companies

If a factoring company doesn’t require you to re-purchase unpaid invoices in the loan agreement, it is executing a non-recourse factoring agreement. Though it’s much less common to find non-recourse factoring companies, they do exist. For example, Riviera Finance is a factoring company that offers non-recourse factoring at up to 95% or your net-30 invoices in as little as 24 hours. Another non-recourse factoring company is OTR Solutions, which offers factoring for trucking companies on net-30, -60, and -90 day invoices, as quickly as the same day.

» Invoice factoring not for you? Consider invoice financing instead

Differences between recourse and non-recourse factoring

The main difference between recourse factoring and non-recourse factoring is which party is ultimately held responsible for customer nonpayment.

With recourse factoring, the business is responsible. But with non-recourse factoring, the factoring company is responsible, although there may be some stipulations based on the terms of the agreement.

As a result, you’ll often see the following differences between these two types of factoring:

Recourse factoring

Non-recourse factoring

Advance rate

Higher advance rates (i.e. amount of funding you receive upfront).

Lower advance rates.

Fees

Lower factor fees.

Higher factor fees.

Funding speed

May be faster to fund.

May be slower to fund. Factoring companies may have additional application requirements or use a more thorough process to approve invoices.

Qualification requirements

Can be easier to qualify for. Factoring companies will consider your customers’ credit and payment history, but may be more flexible in their requirements with this type of factoring.

Can be harder to qualify for. Factoring companies will likely require that your customers have strong credit histories and well-established records of timely payments.

Choosing recourse or non-recourse factoring

Generally, accounts receivable factoring can help business-to-business companies access capital to manage cash flow issues or cover short-term expenses. Factoring is also a good option if you can’t qualify for other business loans, such as bank loans or SBA loans.

If you’re trying to choose between the two types of invoice factoring, there are a couple of things to consider for each one.

Reasons to choose recourse factoring

  • You work with reliable, creditworthy customers. Although recourse factoring is riskier for you, the borrower, you can minimize that risk by ensuring that you work with customers who make their payments consistently and on time. You don’t have to be held responsible for nonpayments if your customers make their payments.

  • You want lower fees and higher advance rates. Since your business is taking on the risk of nonpayment, you’ll typically receive lower fees and higher advance rates with recourse factoring. This means you’ll receive a greater amount of capital upfront, and you’ll be paying less in fees, especially if your customers are reliable and pay in a timely fashion.

Reasons to choose non-recourse factoring

  • You work with risky customers. If your customers don’t have the strongest records of on-time payments and fair credit histories, you might prefer non-recourse factoring. Depending on the terms of your agreement, non-recourse factoring can protect your business from the liability associated with nonpayment from those customers. Keep in mind, however, that you may not be able to qualify for non-recourse factoring if your customers are unreliable.

  • You don’t want to take on the risk associated with nonpayment. If you’re unwilling to take responsibility for the debt if your customers don’t pay, you might choose non-recourse factoring. As long as you have the credentials to qualify, this is a possible option. However, you will likely receive higher factor fees and lower advance rates in exchange for that sense of security.

Compare small-business loans

Check out NerdWallet’s list of best small-business loans to see and compare loan options.

Our recommendations are based on the market scope and track record of lenders, the needs of business owners, and an analysis of rates and other factors so that you can make the right financing decision.