Businesses interested in entering into an invoice finance arrangement have to choose between recourse and non-recourse financing. Factoring brokers like Touch Financial, that offer this type of arrangement may or may not take on the burden of bad debts. This is the primary difference between recourse and non-recourse financing.
In the case of a recourse financing arrangement, any bad debts become the responsibility of the client company. If the customer does not pay by a set date, the company must repay the factor.
In a non-recourse financing arrangement, the bad debts become the responsibility of the factor. If the customer fails to pay, it is the factor that loses out.
Benefits and Risks
Business owners who are trying to decide between non-recourse and recourse invoice finance arrangements need to understand all of the benefits and risks. First, the recourse option is typically cheaper. Factoring brokers, such as Touch financial factoring, reward the client company for the reduced risk by offering a more affordable rate.
Non-recourse factoring is more expensive, because the factor makes a charge to cover the increased level of risk. This can still be beneficial, however, because the company receives cash at the beginning of the process and does not have to concern itself with possible bad debts, all risk having been transferred to factor.
Making the Choice
Both recourse and non-recourse financing bring cash into the company quickly, but there is more risk with the recourse financing option. Companies with a strong and reliable customer base may feel the risk is acceptable, while those with potentially doubtful customers may prefer the higher upfront cost of the non-recourse option.
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