The Cost of Factoring: Non-Recourse Versus Recourse Factoring

Non-recourse Factoring

There are basically two ways to use factoring to inject cash into your business. With non-recourse factoring, which is the more traditional approach, the factor provides credit protection and handles the collection of the accounts receivables. The factor analyzes your accounts receivable accounts and normally charges a flat commission rate on your invoices and interest rate on any money borrowed. If you have some receivables that are considered a higher credit risk, they may also add a surcharge to those accounts. Obviously, a non-recourse factor is taking on more risk and their fees are higher than a recourse factor.

Recourse Factoring

On the other hand, recourse factoring is a more recent and innovative form of factoring. It has extended factoring beyond traditional businesses like textiles and apparels, to businesses such as trucking and temporary staffing companies. These factoring firms are usually smaller and more flexible in their lending practices. Also, they do not necessarily provide credit protection. In other words, the uncollected invoices can be charged back to the client after an agreed upon time period. The recourse accounts receivable factor buys the invoices at a discount and charges that percentage monthly or daily while the invoice is open. The invoices are categorized into tiers or buckets based on credit risk and can be given varying discount rates. These rates normally range around 1% to 3% per month depending on the credit history of the account. Recourse factoring fees are lower than non-recourse factoring fees since they are sharing the risk with the client.

Which Type of Factoring is Right for Your Company?

Larger non-recourse factors typically work with bigger companies that carry a large amount of inventory. These factors can also help businesses that are growing through mergers and acquisitions instead of organically. Some non-recourse factors also lend against intangible assets, such as trademarks. If your business falls into one of those categories, a traditional recourse factoring company may be right for you.

Smaller, more entrepreneurial recourse factoring companies work well with undercapitalized companies that are growing, but are unable to secure bank financing to capitalize on the growth opportunities in their market niche. If you are in this category, recourse factoring provides you the funds you need to market and promote your product or service to continue generating sales.

The growing business considers the factors fee as a cost of doing business, as the reasonable discount rate is offset by the cash flow that enables them to grow sales. Normally, the factors will even accept a portion of your receivables as long as you meet certain minimum volume requirements. If you hardly ever write off bad receivables, you can save money by using recourse factoring, as the costs are typically lower than the non-recourse options.

The Bottom Line

The difference in the cost of these two methods of factoring boils down to the cost of risk. The non-recourse factor takes on all the risk of collecting on the invoices and charges more, while the recourse factor shares the risk with the client and charges less.