How Recourse and Non-Recourse Factoring Compete
What is Recourse?
Recourse defines the terms of the invoice financing agreement in case the debt is not paid. This is a significant term of the agreement as it describes who assumes responsibility for bad debts if they arise. Please read about how recourse and non-recourse factoring compete.
Recourse factoring occurs when the business having its invoices factored assumes responsibility for uncollected debts. When calculating the terms, the factor does not consider customers’ creditworthiness; rather, it considers the full sales ledger. As this is an additional risk for the funding company, the business receiving the payment for accounts receivable invoices is ultimately responsible for covering any bad debts assumed by the funding agency.
Although recourse factoring shifts the bad debt risk to the borrower, it also reduces overall factoring costs. The trade-off for the borrower is risk versus price. If a business has customers paying reliably, it can be quite worthwhile to get recourse factoring terms due to the reduced risk of default.
Non-recourse factoring is also called secured debt collateral. The factoring process is identical to recourse factoring but who assumes responsibility for the debt changes from the business to the factoring company. Non-recourse factoring also includes All collection and bad debt risks are absorbed by Swift Funding Solutions with non-recourse factoring terms. Due to the enhanced risk shifting from the business to the funding agency, the transaction fees are higher.
Businesses choose non-recourse factoring due to two fundamental benefits. Cash is received with zero follow up risk. This answers the cash crunch and eliminates risk in case customers do not pay. This works as a form of credit insurance because businesses get cash immediately without exposure to ongoing bad debt risk.
Should I Choose Recourse or Non-Recourse Factoring?
This varies considerably across industries and is hard to define for specific businesses here. Recourse factoring comes with a lower cost proposition for most businesses and is the best option for those with reliable customers that pay invoices. When uncertainty defines accounts receivable invoicing and debt collection, businesses can shift risk by paying more for non-recourse factoring terms as a form of credit insurance.
We are here to assist our customers in selecting the ideal recourse terms that meet the needs of their business. Contact us today to discuss your accounts receivable profile and recourse factoring terms.
Have Questions? Get Answers.
You might be cash-strapped and interested yet the questions are mounting if invoice factoring is right for your business. Please read our Frequently Asked Questions.
Is Invoice Factoring Right For My Business?
Invoice factoring is an excellent strategy for many businesses across a variety of sectors. Collecting invoice payments is not only a labor-intensive process but it can strangle a business of the cash it needs now. If you want to dedicate fewer resources toward debt collection and access cash on those invoices immediately, invoice factoring can help your business.