There are several types of invoice factoring relationships available to businesses that sell to other businesses. Full-recourse invoice factoring is the most common type in which the borrower assumes 100% of the credit risk of the customer. It’s important to understand if your invoice factoring arrangement is full-recourse or non-recourse.
Full-recourse invoice factoring most common invoice factoring arrangement
When a business owner is evaluating potential invoice factoring relationships, one of the choices they must make is they should decide whether they need a full-recourse factoring relationship or a non-recourse invoice factoring relationship.
In a full-recourse invoice factoring relationship, the borrower business assumes 100% of the credit risk of the invoices being financed (factored). In a non-recourse invoice factoring relationship, the factoring company assumes most of the credit risk (approximately 80%) while the borrower assumes a smaller percentage (approximately 20%).
Most invoice factoring companies set up their relationships as full-recourse arrangements. There are many reasons why full-recourse invoice factoring is most common, but the biggest reason is it is less expensive for the lender to provide full-recourse invoice factoring than non-recourse invoice factoring. Full-recourse arrangements are easier to manage as the lender simply reassigns or sells back the invoice to the borrower when it becomes 90+ days past the date the invoice was factored.
Borrower assumes 100% of credit risk in full-recourse invoice factoring
Usually full-recourse factoring arrangements aren’t specifically called “full-recourse,” rather they simply leave off language calling the arrangement “non-recourse.” The philosophical assumption of invoice factoring companies that use a full-recourse arrangement is “if the borrower is not willing to guarantee the credit-worthiness, why should we?” It is a moot point if your customers are fortune 500 companies or other companies that are large and very credit-worthy. In a non-recourse invoice factoring relationship the legal documents will specify when the borrower must repurchase an “old” invoice. Usually this is 90 days from the date the invoice was sold to the factoring company. At the time the invoice ownership reverts back to the customer, the duty to collect the outstanding invoice is 100% borne by the borrower.
Soft collection practices are one reason borrowers choose full-recourse invoice factoring
Many borrowers are rightfully concerned that the factoring company they do business with will use soft collection practices with their customers. In full-recourse invoice factoring relationships this is much easier to control. The full-recourse factoring company is most likely to even leave collections up to the borrower. In non-recourse arrangements this may not be the case.
Most borrowers don’t need the features of non-recourse invoice factoring arrangements
There are a few industries where non-recourse factoring is the standard practice, but most businesses won’t benefit from having a non-recourse arrangement. Ask any prospective factoring company which arrangements they offer. Occasionally borrowers have higher costs in non-recourse invoice factoring arrangements.
There are a number of decisions you must make when choosing a factoring company and avoiding unscrupulous factors is the most important.