Recourse vs non recourse factoring
Non recourse does not mean you are off the hook.
It is the most misunderstood word in receivables finance. Non recourse protects you against 1 specific thing, defined narrowly in the agreement, and against nothing else. Owners who believe otherwise discover the difference at the worst possible moment, usually 91 days after an invoice went out.
The short answer
Non recourse covers insolvency, not non payment.
Then the detail, if you want it.
Under a recourse facility, if your customer does not pay within the agreed window, typically 90 days, the invoice comes back to you. The factor charges the advance back against your reserve or your next funding, and you carry the loss and the collection effort.
Under a non recourse facility, the factor absorbs the loss when the customer fails to pay for a defined credit reason: insolvency, bankruptcy, or a formal inability to pay. That is the whole of it. If the customer simply pays late, disputes the work, offsets against a claim, goes quiet, or you delivered something they did not order, the protection does not apply and the invoice comes back to you exactly as it would under recourse.
The premium for non recourse is commonly 0.5 to 1.5 points on the fee. It is worth paying when 1 customer is large enough that its failure would take the business with it. It is rarely worth paying as general insurance, because the events it covers are not the events that usually go wrong.
Side by side
Where they actually differ.
| Recourse | Non recourse | |
|---|---|---|
| What is covered | Nothing; every unpaid invoice returns to you | The customer's insolvency or bankruptcy, as defined |
| Late payment | Charged back after the recourse period | Charged back; lateness is not a credit event |
| A dispute about your work | Charged back | Charged back; disputes are excluded |
| Customer offsets against a claim | Charged back | Usually charged back |
| Typical fee difference | Lower | 0.5 to 1.5 points higher |
| Credit approval per customer | Lighter | Strict; the factor sets a limit per customer |
| Who chases the money | The factor collects, you absorb the loss | The factor collects and absorbs a covered loss |
| Effect on your reserve | Chargebacks come out of the reserve | Same, except for covered events |
| Best fit | Diversified book of reliable payers | Meaningful concentration in 1 or 2 large accounts |
General descriptions of common structures, not offers and not a ranking. Every facility is arranged through third party lenders and funders and is subject to their underwriting, documentation and approval; the actual agreement governs.
What actually decides it
Concentration, not optimism.
Reading the agreement
The question is not whether you would like protection. It is whether the failure of a single customer would be an inconvenience or an extinction event. If your largest account is 15% of the book, recourse at a lower fee is usually the better economics and you self insure the tail. If it is 45%, the premium buys something real.
Then read 4 clauses before you sign anything. The definition of the credit event, word for word, because that is the entire extent of the protection. The dispute carve out, which is where most real losses live. The credit approval mechanism, meaning whether the factor approves each customer in advance and what happens to invoices it has not approved. And the recourse period itself, because 60 days and 120 days are very different facilities at what looks like the same price.
Note also that non recourse protection generally applies only to invoices the factor approved in advance, at the limit it set. An invoice above that limit is typically recourse regardless of what the facility is called.
What goes wrong
The mistakes that cost the most.
Assuming non recourse means guaranteed payment
It covers insolvency, not reluctance, not lateness, and not disagreement about your work. The majority of unpaid commercial invoices fail for reasons outside the definition.
Ignoring the dispute carve out
Any invoice the customer contests, for any reason including quality, quantity, timing or paperwork, is almost always excluded from non recourse protection. Clean delivery documentation is worth more than the premium.
Invoicing above the approved credit limit
Amounts over the limit the factor set for that customer are usually recourse. Check the limit before you take a larger order, not after you have shipped it.
Paying the premium on a diversified book
If no customer can sink the business, non recourse is expensive insurance against an event that would have been survivable anyway. Put the money against the fee instead.
Missing the notice deadlines
Coverage is conditioned on notifying the factor within a stated window and cooperating with collection. Miss the window and the protection lapses even on a covered event.
Questions
What owners ask.
Is non recourse factoring the same as credit insurance?
It is similar in effect and different in structure. The factor is typically buying credit insurance behind the scenes and passing the protection through in the fee, which is also why the covered events mirror an insurance policy rather than a commercial promise.
Can I use non recourse on some customers only?
Frequently yes. Many facilities approve non recourse treatment per customer, up to a set limit each, with everything else on recourse terms. It is often the right structure.
Does non recourse remove the personal guaranty?
No. Guaranties in factoring agreements typically cover performance, warranties about the invoices, and fraud, not customer credit. They survive a non recourse facility.
What is a reserve?
The portion of the invoice the factor holds back, commonly 10% to 20%, released when the customer pays. Chargebacks are taken out of it first, which is why the reserve balance is worth watching.
Which one do most businesses end up with?
Recourse, on a diversified book, with non recourse carved out for the 1 or 2 accounts large enough to matter. The price difference is easier to justify per customer than across everything.
Start with the file
A straight read within 2 business days.
Send the basics through the intake form: what the file supports, what is missing, and the next step if there is one. If we are not the right desk for it, we say so.