Recourse factoring is a factoring arrangement in which the business selling its invoices keeps the risk that a customer will not pay. If an invoice goes unpaid past a set point, the seller must buy it back, replace it with a good invoice, or let the factor recover the shortfall from reserves or future fundings.
How it works in factoring
The factor still advances cash, verifies invoices and usually handles collections. The difference is what happens when collection fails. A recourse agreement typically states:
- A recourse period, measured from the invoice date or purchase date, after which an unpaid invoice is "charged back"
- How the charge-back is settled: deduction from the reserve, offset against new fundings, or a direct payment
- Whether fees keep accruing on the unpaid invoice until it is charged back
Illustrative example: An agreement with an assumed 90-day recourse period means that if a customer has not paid an invoice 90 days after purchase, the seller owes the factor the advanced amount plus accrued fees.
Because the factor's loss exposure is lower, recourse arrangements are often easier to qualify for and may carry lower fees than non-recourse options. Many recourse agreements also include a personal guarantee or validity guarantee from the owners.
What to check
- The length of the recourse period and when it starts
- Whether recourse covers only nonpayment or also disputes and short pays
- How quickly the factor can deduct charge-backs from your reserves
- Whether repurchase obligations survive termination
Recourse factoring tends to fit when you are confident in your customers' ability to pay and want lower costs in exchange for keeping the credit risk.