Overview

Invoice factoring lets a business sell its outstanding invoices to a factor in exchange for immediate cash. The key difference between standard (or non‑recourse) factoring and recourse factoring is who ultimately absorbs the credit risk when a customer fails to pay.

How each option allocates risk

  • Invoice factoring (general): When a factor buys invoices outright without recourse, the factor assumes the credit risk. If the end customer defaults, the factor cannot demand repayment from the seller. Non‑recourse arrangements are less common and typically cost more because the factor assumes more risk (U.S. Small Business Administration: https://www.sba.gov).

  • Recourse factoring: The seller agrees to buy back or reimburse the factor for invoices that go unpaid or that the customer disputes. That shifts most of the credit and collection risk back to the seller, usually lowering the up‑front fee or improving the advance rate.

Key pricing and structural terms to watch

  • Advance rate: The percentage of the invoice the factor advances immediately (commonly 70–90%). A higher advance rate may come with higher fees or stricter recourse terms.
  • Reserve: The portion of the invoice amount the factor holds back until the customer pays; the reserve is released after payment, less fees.
  • Factoring fee / discount rate: Typically quoted as a percentage of invoice value and can vary by industry, typical risk, and invoice age. Fees commonly range from under 1% up to several percent per transaction; the effective annualized cost depends on how long invoices remain outstanding (Investopedia: https://www.investopedia.com).
  • Recourse obligation: The contract language that defines when you must reimburse the factor (e.g., customer bankruptcy, rejection, long delinquency).

Practical examples (illustrative)

  • Non‑recourse example: A wholesaler sells $50,000 in invoices to a non‑recourse factor, receives $45,000 up front (90% advance) and later the factor collects payment. If a buyer defaults, the factor absorbs the loss.

  • Recourse example: A manufacturer accepts recourse factoring for $100,000 in receivables, gets $80,000 up front (80% advance). A $10,000 invoice becomes uncollectible; the manufacturer must repay that $10,000 to the factor (or the factor offsets against future settlements).

Which businesses benefit from each approach

  • Non‑recourse (factor bears risk): Best if you want to transfer credit risk off your books, if you sell to buyers with unknown credit quality, or if you need predictable cash flow without contingent liabilities.
  • Recourse (seller bears risk): Often cheaper and more widely available. Good for businesses with reliable, creditworthy customers that rarely default and that want lower fees or higher advance rates.

Decision checklist

  1. Review your customer credit profile — if customers have solid payment histories, recourse factoring can be cost‑effective.
  2. Read the contract for recourse triggers — understand what events (e.g., disputes, returns, bankruptcy) create repayment obligations.
  3. Compare advance rate vs. fee tradeoffs — a higher advance with recourse may still be less costly than a lower advance with non‑recourse fees.
  4. Consider collections responsibility — non‑recourse factors often take over collections, which affects customer relationships.

Common mistakes to avoid

  • Assuming all factoring is non‑recourse. Many factors offer recourse as the default and only charge a small premium for non‑recourse coverage.
  • Overlooking hidden triggers that create recourse obligations (e.g., buyer disputes, short‑paid invoices, credit memos).
  • Focusing only on the advance rate and not the effective cost across the invoice life cycle.

Interlinks

Professional perspective

In my experience advising small and mid‑sized firms, recourse factoring is frequently the lower‑cost option when your customer base is reliable. However, the contingent liabilities created by recourse agreements can cause sudden cash demand if a large customer fails; I recommend stress‑testing your cash runway for that scenario before signing.

Authoritative sources

Disclaimer

This article is educational and not individualized financial advice. Consult a qualified accountant, attorney, or financial advisor to evaluate how factoring or recourse obligations affect your business’s balance sheet and cash‑flow forecasts.