RECOURSE AND NON-RECOURSE FACTORINGThere is no one size fits all solution in factoring. Every business has unique circumstances, which creates a need for customized programs. Depending upon your circumstances and needs, we can offer a Full-Recourse or a Non-Recourse program. We want to make sure that you understand the difference between the two so you can make the best choice for your business.
What Is Full-Recourse Factoring?
Recourse factoring – the most common kind of factoring. With a full recourse program, should your customer fail to pay an invoice within the Recourse Period, for any reason, you will be asked to buy back the invoice. Depending upon your advance, this may be accomplished in a few different ways. Our typical recourse period is 90 days. This means that if we cannot collect the full amount of the invoice within the 90-day period, we will charge the invoice back to you. Normally, because we are checking your customer’s credit before funding an invoice, and we are also performing collections, chargebacks for non-payment are not experienced that frequently. A more likely scenario is that your customer “short pays” an invoice. In the event of a short-pay, we will look to recoup the shorted amount via the chargeback process mentioned above.
Which Program is Best for Your Business?
We can offer either type of factoring. In trying to decide which is best for you, know that a non-recourse program will be more expensive in terms of your factoring fee – by up to 1%. Because the risk is higher to the factoring company, they will charge a premium for non-recourse factoring. In addition, under a non-recourse program, the factoring company will tighten its credit standards, which ultimately means you may experience more credit declines. For example, if you present a customer to the factoring company that has marginal credit, under a full-recourse program the factoring company may approve credit; but under a non-recourse program, for that same customer the factoring company will likely decline credit. So, a non-recourse program may mean that you will have fewer credit approved customers.
What is Non-Recourse Factoring?
Non-Recourse factoring – perhaps the most widely misunderstood type of factoring. Under a non-recourse program, should your customer fail to pay an invoice for credit reasons, your factoring company will incur the loss. For any other reason outside of credit, you will still have the invoice charged back to you. For example, if your customer fails to pay the invoice because they have become insolvent or recently filed bankruptcy, then the factoring company will incur the loss. If, however, your customer fails to pay the invoice due to a dispute; for non-delivery; for a damaged freight claim; etc., or for any other reason not related to credit, the invoice will be charged back to you. In other words, your factoring company is willing to take responsibility for their credit decisions. Anything outside of that and you will assume the risk of non-payment.
How Do You Decide?
In transportation, non-recourse is not always the optimal choice, especially because there is such high collections success on freight bills. Probably the best way to decide if non-recourse is best for you is to ask yourself this question: Have you ever had an invoice go bad because your customer filed bankruptcy? If the answer is no, then you probably don’t need a non-recourse program. If the answer is yes, then ask yourself if the added expense is worth the minimal protection that you will get under the non-recourse program. And, if you just aren’t sure, give us a call and we will do our best to help you clearly understand the specifics about non-recourse.