Every factoring agreement answers one question: if your customer never pays an invoice, who takes the loss? The answer sits in the recourse terms. This chapter explains both main options and the fine print that separates them.
Recourse factoring
With recourse factoring, you remain responsible if your customer does not pay. If an invoice goes unpaid past a set period, you must buy it back from the factor, replace it with a new invoice of equal value, or let the factor deduct the amount from your reserves or future advances.
Recourse factoring is the more common structure. It is often easier to qualify for, because the factor carries less credit risk.
What it means for you:
- You still need to sell to customers who pay reliably.
- A single large unpaid invoice can hit your cash flow hard.
- The factor still checks your customers' credit, since it does not want to chase you for buybacks either.
Non-recourse factoring
With non-recourse factoring, the factor takes on some of the risk that your customer does not pay. But "non-recourse" almost never means the factor covers every unpaid invoice for any reason.
What non-recourse usually covers
Non-recourse protection is typically limited to a credit event. That usually means your customer cannot pay because it is financially unable to. Common examples written into contracts include:
- Your customer files for bankruptcy
- Your customer becomes insolvent or goes out of business
- Your customer fails to pay within a set period for credit reasons
The exact trigger is defined in the agreement. Read it word for word.
What non-recourse usually does not cover
Non-recourse protection generally does not apply when the customer refuses to pay for reasons tied to you or your work. Common exclusions include:
- Disputes over quality, quantity, pricing or delivery
- Invoices for work not yet completed or goods not yet delivered
- Customer deductions, offsets or credits you agreed to
- Invoices that break your warranties to the factor, such as duplicates or inaccurate amounts
- Customers the factor did not approve, or amounts above the customer's approved credit limit
- Fraud or misdirected payments
In these cases, the invoice usually becomes your responsibility again, just as it would under recourse factoring.
Credit limits
Under non-recourse terms, the factor will often set a credit limit for each customer. Invoices above that limit may be purchased with recourse, or not at all. If a customer's credit weakens, the factor may lower the limit for new invoices.
Recourse periods
A recourse period is the length of time the factor waits for payment before it can send an unpaid invoice back to you. It is usually counted from the invoice date or the purchase date.
When the period ends, the agreement will spell out what happens:
- You repurchase the invoice for the amount advanced plus fees, or
- You replace it with a fresh, eligible invoice, or
- The factor offsets it against your reserve or upcoming advances.
Some agreements also keep charging fees on an invoice until it is repurchased. That can make a long-unpaid invoice expensive. Ask how fees accrue after the recourse period ends.
Recourse periods are quoted per client. Compare them along with the fee schedule, since a shorter period can mean you buy back invoices sooner.
How the cost compares
In general terms:
- Recourse factoring tends to cost less, because the factor is not insuring against your customer's failure.
- Non-recourse factoring tends to cost more, may come with lower advance rates or tighter credit limits, and can require stronger customers.
There is no standard premium. The difference depends on your industry, your customers' credit, your volume and how the factor defines a credit event. Ask for both options in writing if a factor offers them, and compare the full cost, not just the headline fee.
Choosing between them
Questions to weigh:
- How strong are your customers? If they are large, stable payers, the extra cost of non-recourse may buy little protection.
- How concentrated are your sales? If one customer could sink you by failing, non-recourse protection may be worth more.
- How often do you have disputes? Non-recourse will not help with disputes, so it does not fix quality or billing problems.
- Do you already have credit insurance? Some businesses buy trade credit insurance separately and use recourse factoring.
Frequently asked questions
Does non-recourse mean I never have to pay anything back?
No. Non-recourse usually covers only a customer's financial inability to pay. If the customer disputes the invoice, or you broke a warranty in your agreement, you may still have to buy the invoice back.
What is a typical recourse period?
It varies by factor and is quoted per client. Read the agreement for the exact number of days and for how fees accrue during and after that window.
Can I switch from recourse to non-recourse later?
Sometimes. It is a contract change, so the factor will look again at your customers and may change your fees or limits.