Non-Recourse Factoring

Non-recourse factoring is a type of invoice factoring in which the factoring company takes on the credit risk of debtor insolvency. If a customer becomes insolvent and is unable to pay an assigned invoice, the factor bears the loss rather than charging it back to the client. This is in contrast to recourse factoring, where the client remains liable for bad debts.

Non-recourse protection typically covers insolvency only, not protracted default (where a solvent customer simply refuses to pay). The factor achieves this by taking out trade credit insurance on the debtors it funds. This insurance premium is incorporated into the overall cost of the facility.

Non-recourse facilities are more expensive than recourse arrangements because the factor is absorbing additional risk. They are particularly valuable for businesses with exposure to financially weaker customers, businesses in sectors with higher insolvency rates, or businesses for whom a single large bad debt could be catastrophic.

Example

A business factors a £100,000 invoice from a customer. The customer subsequently enters administration and cannot pay. Under a non-recourse facility, the factor absorbs the loss. Under a recourse facility, the £100,000 would be charged back to the business.

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