Getting Recourse Or Non Recourse Business Factoring PDF Print E-mail
Written by Jack Bennington   
Tuesday, 13 July 2010 13:21
Business factoring refers to a sale transaction of the accounts receivables of a company to a third entity identified as a factor. The arrangement is oftentimes without recourse. This means a factor is unable to enforce payment from vendor in instances where customers do not pay. In notification basis, customers can pay straight to this factor. Or, in case of non notification basis, the debtor can pay the seller and the seller is the one to give the cash to a factor. American Accounting specifies that invoices are good as sold once the factor chooses non recourse transaction.
by JackBennington


Business factoring refers to a sale transaction of the accounts receivables of a company to a third entity identified as a factor. The arrangement is oftentimes without recourse. This means a factor is unable to enforce payment from vendor in instances where customers do not pay. In notification basis, customers can pay straight to this factor. Or, in case of non notification basis, the debtor can pay the seller and the seller is the one to give the cash to a factor. American Accounting specifies that invoices are good as sold once the factor chooses non recourse transaction.

Essentially, there are two forms of factoring which are recourse and non-recourse factoring. Recourse factoring happens in cases where a factor can pressure the seller in case of non-payments. A factor can collect money from a seller if the customer does not pay off his debts. The factoring arrangement will specify the amount of days just after the amount owed is due for the collection of repayment of advances. The seller maybe required to refund the cash received. In some cases, it is not required. But this seller must pay for charges and fees in interest if factoring is recourse.

Recourse is less costly in comparison to non-recourse factor. The requirements concerning debtors as well as the programs may not be as many as non recourse. A seller assumes the risks in recourse factoring.

Various factoring deals require that settlement must be done in a period of 3 months. In addition to that stipulation, 80% of these invoices should be advanced to seller. For example, a bill is created on January 1 worth $10,000. The factor gives the seller a cash advance worth $8,000.

A seller will collect the payment from the debtor once the three month period has lapsed since the responsibility of the debt reverts back to seller. A factoring company does not hold a claim against the customer. But since they hold the ledger for a period of three months then he needs to make calls to the customer within that span of time. This is part of their of their task as the manager of the sales ledger. The seller will have the burden to recoup the payment from the debtor.

Once 3 months expires in March 31, this seller should return to the factoring company the cash advanced valued at $8,000 even if he is not paid by the debtor. Furthermore, he needs to pay back the factor for its service charges and interest fees.

Non-recourse factoring is when the factoring firm assumes the risks in case the debtor does not pay. It provides specific rules regarding the kind of risks they accept such as total abandonment of debts. However, they might not have rules regarding slow payment. Since the factoring company assumes all the risks of non-payment of debt, they often charge higher fees than recourse factoring.

This seller does not need to reimburse a factor on the cash advances for the invoice. But, and once the amount of time permitted has lapsed, seller has to pay factor fees such as interest and service charges. The factoring company in a non-recourse agreement have total rights when it comes to customers' settlement of debts. In non recourse business factoring, this privilege may include the use of legal means to impose the payments of invoices.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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