Recourse factoring and non-recourse factoring
In certain circumstances, a factoring arrangement could involve the factor taking on the risk of bad debts.
Recourse factoring
In recourse factoring, the factor does not take on the risk of bad debts. They will be able to reclaim their money from you even if the customer does not pay. The factoring agreement will specify how many days after the due date for payment you must refund the advance.
Whether you refund the advance or not, you will still have to pay the fee and interest (discount charge).
Recourse factoring is cheaper than non-recourse factoring and may have fewer requirements concerning your customers and your systems. This is because you are taking the bad debt risk.
For example:
- The factoring agreement requires payment to be made within no more than three months. It also states that 80% of each invoice will be advanced.
- On 30 April an invoice for 拢10,000 is issued and the factor advances 拢8,000.
- On 31 July, if the customer has not paid, 拢8,000 must be repaid to the factor. There is no refund of the factoring fees relating to the debt.
Non-recourse factoring
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.
You never have to refund the advance to the factor, but you must pay the discount charge (interest) to the factor for any advance against the invoice for the period prior to the bad debt payment being made.
The factor takes over all rights to pursue the customer for payment. This includes the right to take legal action.