Recourse vs. Non-Recourse Factoring: What Small Businesses Should Know

Recourse vs. Non-Recourse Factoring: What Small Businesses Should Know

When a business turns to invoice factoring to improve cash flow, one of the first choices it must make is between recourse and non-recourse factoring. Both provide quick access to working capital by selling unpaid invoices to a factoring company, but the key difference lies in who assumes the risk if a customer fails to pay.

In a recourse factoring agreement, the business remains responsible for repurchasing or replacing any invoices that go unpaid. With non-recourse factoring, that risk shifts to the factoring company offering more protection, but often at a higher cost.

Understanding this distinction is essential before signing a factoring agreement. The right option depends on your customers’ credit strength, your company’s cash-flow needs, and how much financial risk you’re comfortable taking on.

If you’re new to factoring, see our foundational guide on What Is Invoice Factoring, which explains how the process works in detail and what to expect when partnering with a factor.

What Is Recourse Factoring?

In recourse factoring, your business remains responsible if a customer does not pay the invoice. The factoring company advances funds upfront often between 70% and 90% of the invoice value but if your customer defaults or delays payment beyond a certain period, you must repay or replace that invoice.

Because the factoring company’s risk is lower, recourse factoring typically comes with lower fees and higher advance rates. It’s the most common form of factoring in the United States, used by trucking companies, manufacturers, staffing agencies, and other small businesses that serve creditworthy commercial clients.

Example:
A construction subcontractor factors a $100,000 invoice. The factor advances $85,000 immediately. If the client pays within sixty days, the subcontractor receives the remaining $13,000 minus a small fee. If the client fails to pay, the subcontractor must buy back the invoice or substitute another one of equal value.

Recourse factoring works well for companies confident in their customers’ ability to pay and looking for the lowest possible factoring cost.

What Is Non-Recourse Factoring?

In non-recourse factoring, the factor assumes the credit risk. If your customer becomes insolvent or goes out of business, the factor absorbs the loss. You are not required to repay the advance, provided the non-payment was due to insolvency and not a dispute over goods or services.

Because the factor carries greater risk, non-recourse agreements usually involve higher fees and slightly lower advance rates. In return, they provide peace of mind for businesses working with new or unpredictable customers.

Example:
A small manufacturer sells $50,000 in invoices under a non-recourse agreement. The factor advances $42,500 upfront. If the buyer later declares bankruptcy, the factor bears the loss, and the manufacturer keeps the advance without obligation.

Non-recourse factoring can be an excellent choice for businesses in industries with volatile clients or when diversification of customer risk is limited.

Conclusion

Both recourse and non-recourse factoring provide valuable access to working capital by converting unpaid invoices into cash. The difference lies in how each handles risk.

Recourse factoring offers lower fees and greater flexibility for businesses with reliable customers. Non-recourse factoring transfers more risk to the factor, providing security in exchange for higher cost.

Understanding these differences allows you to select the structure that best fits your operations and customer base. Whether you prioritize cost savings or protection, factoring remains a powerful tool for improving cash flow and supporting business growth.