What is Recourse Factoring?

When looking for a Factoring company it is helpful to understand if their funding methods are “recourse” or “non-recourse” factoring.

With recourse factoring the company selling the invoices (the client) is basically guaranteeing the invoice will be paid in full. A factoring company will generally charge back any delinquent invoices to the business client after 90 days, depending on the terms of the agreement.

In the event the debtor does not pay the invoice, the company must make up the payment. This is usually accomplished by either lowering future funding via a “reserve” or by replacing the “bad” invoice with another “good” one.

In addition to who “makes good” on any “bad” invoices, the client may receive much better pricing if they are open to a recourse situation. Frankly, that makes sense if you think about it. If the factoring company is taking all the risk, the pricing is going to have to be reflective of that risk.

There is no right or wrong method to utilize. But, if comparing two factoring companies side-by-side and you have the choice of non-recourse for the same fees – then non-recourse just may be your best choice!

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