Invoice factoring is a beneficial option for businesses looking to increase cash flow without taking out a line of credit or a bank loan. As a business, when you are looking into invoice factoring as an option for your business, you will soon recognize that there are two different types of factoring accounts - Full Recourse Factoring and Non-Recourse. While both account types allow businesses to factor their invoices, there are a few key differences that you should also be aware of.
When you factor your invoices with an invoice factoring company, you are essentially liquidating your invoices as they are created. Because of this, your business growth is no longer reliant on waiting for payments from said invoices.
With this increase in cash flow, you are able to better your business, including taking advantage of early pay discounts from your suppliers, volume discounts on raw materials, or any other convenience that cash provides to you.
However, as you begin to investigate different invoice factoring companies to find the best one for your business, you should be aware of the two different account types they offer - Full Recourse and Non-Recourse.
What is Full Recourse Factoring?
Full recourse factoring is the more common account of the two. A full recourse account means that you, the client, is ultimately responsible for the amount of your customer’s invoice in case they do not pay.
At UC Factors, we run credit checks on each of our client’s customers before we agree to factor any invoices from them. If we agree to factor the invoice, it is because we feel - 99% of the time - that the customer will be willing and able to pay the full amount of the invoice within the agreed upon terms.
However, in the off chance that the customer does not pay the invoice back within the terms stated in the contract between the factor and the client (usually 75-90 days), the client will be responsible to pay the full amount advanced plus the factoring fee.
Full recourse accounts are more common in the factoring industry. However, at UC Factors, we don’t merely rely on the fact that our client has a full recourse account. We still want to protect them and ensure that their customer will pay the invoice and not put our client in the position of having to pay it back.
Because of this, we run credit checks on every customer in our client’s accounts - even for small invoices or accounts. We want to be sure that each customer is reputable and will not put us or our clients in a bad position.
What is Non-Recourse Factoring?
Non-recourse factoring means the factor is solely responsible for the credit of the customer. If the customer is unable to pay for credit insolvency reasons, the client will not be held responsible for the payment.
Again, at UC Factors, each customer in the client’s account will have their credit checked before we agree to purchase any invoices against them. This is done during our customer credit check approval process.
We don’t run any different checks than we would if the account was a full recourse account. We are still trying to determine the probability that the customer will be able to pay on their invoice.
If a customer does not pay on a non-recourse account due to credit insolvency, the responsibility lies with the factor to either pursue payment or absorb the loss.
How to Ensure I Have the Right Account Type and Factoring Company
When you are first starting out with a factoring company, they will most likely let you know if you will have a full recourse or non-recourse account.
However, rates for invoice factoring will vary from non-recourse to full recourse, with non-recourse accounts usually seeing higher rates. This is because normally non-recourse accounts are a higher risk to the factoring company than full recourse accounts.
When trying to decide which type of account to use, you need to take two aspects into consideration:
- If you are willing to pay the higher rate for more security (if that is an option)
- How detailed your factor’s credit checks are
A good factor will perform the same credit checks on every customer regardless if the account is full or non-recourse.
If you know the factor has performed its due diligence and you can trust that your customer will pay you back, you may be better off with a full recourse account. Other times, you might not have the option to choose due to your account and the customers in it.
Understanding the difference between full and non-recourse factoring accounts is important when you are considering working with a factoring company.
You want to be sure you are selecting the best company for your business and this includes the best type of account for your business.
By discussing this with your chosen factor, you will be able to work with them to determine if you are eligible for a full recourse account and if a full or non-recourse account will be the best option for your business.
Make sure you choose a factoring company that will be the best fit for your company. Take a look at our guide on how to choose the right factoring company here: