There is a great deal of information on the internet about recourse vs non-recourse factoring. Much of it is wrong. When choosing a Factoring Company it is best that you understand what a factor is offering you.
Recourse Factoring means that if the invoice is not paid by your client by a certain date, the Factoring Company can charge that invoice back to you or you can replace that invoice with another good invoice. In some ways, recourse factoring is similar to a line of credit from a bank with a borrowing base as one of the loan requirements. If an invoice becomes unpaid for example, longer than 90 days a bank won’t let you borrow against it or a factor will ask you to replace either the advanced funds or give them another good unfunded invoice.
In Non-Recourse Factoring, the factoring company gives you a credit guarantee. The factor is responsible for the collection of your invoices; it might be all your invoices or just those from certain clients. Typically this guarantee is in case your client files for bankruptcy. This is a critical point to understand that it is not a guarantee that you are protected for good or services that your client disputes for not meeting specifications. Also, you do not have security if your clients pay slower than normal. However, this “insurance policy” against bankruptcy is critical for your survival. Linen’s n Thing’s, Circuit City, FAO Schwartz, Adelphia, Delta Airlines- all examples of companies that filed bankruptcy that were once thriving companies.
In addition to providing working capital and credit information; protection from a large bad debt is one of the most important services an Invoice Factoring Company can provide. When deciding on a Factor, make sure they offer bankruptcy protection. Many smaller or under-capitalized factors cannot get credit insurance. This fact alone should make you think twice about your choice of a factoring company.