In recourse factoring, the factor does not take on the risk of bad debts. Put another way, the factor will be able to reclaim their money from you if the customer does not pay. The factoring agreement will specify how many days after the due date for payment you must refund the advance. Whether you refund the advance or not, you will still have to pay the fee and interest.
Recourse factoring is cheaper than non-recourse factoring and may have fewer requirements concerning your customers and your systems. This is because you (the client) are taking the bad debt risk. For example:
- The factoring agreement requires payment to be made within no more than 90 days from the invoice date. It also states that 80 per cent of each invoice will be advanced.
- On 30 April an invoice for $10,000 is submitted for funding and the factor advances $8,000.
- On 31 July, if the customer has not paid the invoice so the advance of $8,000 must be repaid to the factor. There is no refund of the factoring fees relating to the debt.
In non-recourse factoring, the factor takes on the bad debt risk. The non-recourse factor accepts specified risks around the debtor’s failure to pay, but it does not insure against debts that are unpaid because of genuine disputes. Because of this, non-recourse factoring is much more expensive than recourse factoring.
You never have to refund the advance to the factor, but you must pay interest to the factor for any advance against the invoice for the period prior to the bad debt payment being made.
The factor takes over all rights to pursue the customer for payment. This includes the right to take legal action.