Factoring without recourse versus factoring with recourse: How do they work?

Factoring is a financial tool that many companies use to improve their liquidity by advancing the collection of their outstanding invoices. This can be confusing with the bill discounting, but throughout this article, we will show the differences in detail.

Of course, it is important to understand that in factoring, there are two main types to consider, which are: factoring with recourse and factoring without recourse. Both offer different advantages and risks, so it’s important to choose the best option, depending on the needs of your company as well as the financial situation of your clients.

What is factoring and why is it important for businesses?

Factoring is an agreement where a company sells its receivables to a financial institution, known as a factor. This entity advances the invoice money before the due date, thus providing immediate liquidity to the company.

In exchange, the factor (i.e., the financial institution) retains a commission, and depending on the type of factoring, may or may not assume the risk of non-payment by the clients.

Companies typically use factoring to improve their cash flow, avoid cash flow problems, and continue operations without having to wait for clients to meet their payment deadlines.

Non-recourse factoring: What does it mean and how does it work?

Non-recourse factoring is a type of factoring where the financial institution assumes the risk of non-payment of the invoices. What does this mean? If the company's clients fail to make payments, the factor cannot claim the advanced money from the company at any point.

This type of factoring is very useful for companies that don’t want to take on risks related to the solvency of their clients, but it comes at a higher cost. In exchange for protection against defaults, the factor’s fees are usually higher. After all, their exposure to risk is greater.

On the other hand, the financial institution will carry out a much more thorough evaluation of the clients before accepting this type of agreement.

Advantages of non-recourse factoring

• Protection against the risk of non-payment
• Improvement of cash flow predictability
• Reduction of the administrative burden related to collections

Disadvantages of non-recourse factoring

• Higher costs
• Not always accessible to small companies

Recourse factoring: What is it and what are its features?

Recourse factoring allows the company to remain responsible for the debt if its clients do not pay the invoices. This means that if there is non-payment, the company will have to return the advanced money to the factor.

This is the type of factoring that is generally cheaper since the factor does not assume the risk of non-payment, the company does. Therefore, it is a more accessible solution for companies with highly solvent clients since, ultimately, the risk of non-payment is lower.

However, it may not be the best option for companies that need protection against clients who have an inconsistent payment history. Therefore, before opting for this option, the situation must always be assessed.

Advantages of recourse factoring

• Lower cost
• More flexibility for companies with trusted clients
• Access to liquidity without high commission charges

Disadvantages of recourse factoring

• The company assumes the risk of non-payment
• Directly impacts the company if the client doesn’t pay

Key differences between non-recourse factoring and recourse factoring

While the definition itself gives us a first clue about what differentiates them, let's go into more detail. When evaluating which of these models is most suitable for your company, it’s crucial to understand the essential differences between non-recourse factoring and recourse factoring. Why? Because they can significantly affect risk management and the cost of service:

• Risk of non-payment - In non-recourse factoring, the risk is assumed by the financial institution or factor, while in recourse factoring, the company assumes this risk.
• Service cost - Non-recourse factoring tends to be more expensive since the financial institution is taking on greater risk. In contrast, recourse factoring is much more affordable.
• Access to financing - While in both cases, the company accesses liquidity fairly quickly, in non-recourse factoring, it is much more likely that the factor will conduct thorough credit evaluations of the clients, which may lead to longer waiting times for the result.

Non-recourse factoring vs. recourse factoring: Which to choose for your business?

The choice between recourse or non-recourse factoring will depend, as you have seen, on various factors. You must take into account not only the advantages and disadvantages but also the solvency of your clients and the cost your company can afford. Here is where you should consider that if you have clients with good credit ratings and you’re not concerned about non-payment, you can opt for recourse factoring. However, if you want to eliminate risk, non-recourse factoring is the best option for your situation.

If you need to assess the situation, we at Inversa can help you find the factoring solution that best suits your business needs. Contact us for personalized advice and access to flexible financing solutions that will allow you to focus on what matters most: growing your business.