Non-recourse factoring is factoring in which the factor, not the seller, absorbs the loss when an approved customer cannot pay for credit reasons. The protection is real but narrower than the name suggests, so the contract definition matters more than the label.
How it works in factoring
In most non-recourse agreements, the factor takes on the credit risk of the account debtor only. That usually means:
- The customer must have been approved by the factor, often with a credit limit
- The loss must result from a defined credit event, commonly bankruptcy or insolvency, and sometimes extended nonpayment
- The invoice must be valid, undisputed and for work actually delivered
Non-recourse protection generally does not cover disputes over quality or quantity, returns, short payments, offsets, or invoices that were inaccurate or fraudulent. Those remain the seller's responsibility. The seller usually signs warranties that each invoice is genuine, and breaking them can turn a non-recourse invoice back into a recourse one.
Factors offering non-recourse terms carry more risk, so they may charge higher fees, lower the advance rate, or limit which customers qualify.
What to check
- The exact definition of a covered credit event
- Whether a customer that simply pays slowly is covered, and after how long
- Whether coverage applies only within the approved credit limit
- What happens to invoices bought above the credit limit
Comparing non-recourse terms with a recourse arrangement plus separate trade credit insurance can be a useful exercise, because the coverage scopes are not always the same.