Non-recourse vs. recourse factoring: understanding the difference
Did you know that there are two types of factoring? There’s factoring with recourse and then there’s factoring without recourse. For simplicity’s sake, let’s refer to these models as recourse factoring and non-recourse factoring.
Before we draw a comparison, you may need a quick recap on how factoring works in general.
Factoring explained in three steps:
- Factoring is a working capital strategy, where a factoring company advances money on your accounts receivable.
- The factoring company deals directly with your customers on your behalf, managing your debtors’ book and credit control.
- The result? You improve your cash flow and you spend fewer hours on back office tasks, giving you more money and time to grow your business.
What happens when your customers can’t pay the invoices?
In the unlikely event that your customers are unable to pay the invoices that you have sold to the factoring company, the “with recourse” or “without recourse” part of your agreement will kick in.
In South Africa, recourse factoring makes up most of the accounts receivable financing industry. In fact, you’ll be hard-pressed to find factoring without recourse in South Africa. Nonetheless, it’s good to know the difference.
How recourse factoring works
With this agreement, your company is liable for buying back receivables that the factor cannot collect payment on. In other words: if your customers can’t pay their invoices and your factoring company has gone to reasonable lengths to collect payment, your business will need to cover this cost.
However, a highly experienced and well-established recourse factoring company like Merchant Factors has a lot of systems in place that aim to prevent this from happening – as well as support you should this type of event ever occur:
When you partner with Merchant Factors, their expert accounts and credit control team assesses the creditworthiness of your customers by:
- Collecting credit risk related information
- Conducting thorough credit checks
- Assessing credit limits carefully
They are also scrupulous about sending reminder letters and final demands where necessary and as guided by you. Furthermore, Merchant Factors provides support and guidance to assist in the settling of disputed accounts.
How does non-recourse factoring work?
With a non-recourse factoring agreement, the factoring company accepts more of the risk of non-payment by your customers. While this may sound attractive from a risk management point of view, it’s important to be aware of the costs:
- Non-recourse factoring is typically more expensive than recourse factoring, in terms of the fee charged on invoices funded.
- The few companies that do offer factoring without recourse tend to be very selective about the facilities they agree to. This means that non-recourse factoring tends to be limited to invoices with creditworthy debtors. If the debtor has a poor credit rating and payment history, it’s unlikely that the factoring company will agree to a non-recourse factoring model.
You’re in expert hands
Like any factoring service provider in South Africa, Merchant Factors does not offer non-recourse factoring. However, this factoring specialist does go to great lengths to collect on your invoices and avoid entering agreements when companies have customers with bad credit and poor payment histories.
Being a recourse factoring company, Merchant Factors does not have to charge a higher fee to make up for holding some of the risk. This means that you benefit from competitive factoring fees when you choose to partner with Merchant Factors.
From application to pay-out, we offer the shortest turnaround time in the industry as the only independent debtor finance institution in South Africa.For fast, flexible invoice financing – contact Merchant Factors today.
Finance beyond the Numbers.