Accounting · July 24, 2020

Non-Recourse Invoice Factoring Can Buffer Cash Flows

If you're seeking short-term options to keep cash flowing when spiking growth rapidly consumes funds or times are tight, non-recourse invoice factoring might be a good option. Put simply, invoice factoring allows you to capitalize on current sales to generate needed funds.

Factoring involves selling an outstanding invoice to a third party, commonly known as a factor. The factor pays you a significant portion of the amount due—usually between 75% and 85%—and pays the balance, minus a transaction fee, when it collects the full amount from the customer.

Factors, which offer either recourse invoice factoring or non-recourse invoice factoring, gauge the creditworthiness of your customer before accepting an invoice and usually set a 30, 60, or 90-day term. The practice is most common in industries where payment cycles are long, such as manufacturing, trucking and freight services, oil and gas, and government contracting.

An important distinction

Not all factoring agreements look alike. The difference rests primarily in how much risk the factor takes on and how much your business does.

A recourse factoring agreement allows the factor to sell the outstanding invoice back to you if the customer doesn't pay within a certain period of time. Although the factor may accept another invoice to replace the unpaid one, the responsibility for collection on the initial invoice still falls on you. Since you never offload the collection risk, recourse factoring generally carries lower fees.

Alternatively, non-recourse invoice factoring arrangements involve the factor assuming more responsibility for collections, so they charge higher fees. If the customer doesn't pay the factor, you may be able to keep the original payment, although levels of protection vary.

Some factors allow for multiple complications in a non-recourse factoring arrangement, while others will only extend protection if the customer declares bankruptcy. In all cases, non-recourse factoring will not cover a lack of payment due to quality or performance issues with your goods or services.

Finding your best match

So, which type of factoring best fits your business needs?

It's best to reserve recourse factoring for times when you're confident the customer will pay their invoice, but you simply want access to a portion of the cash sooner rather than later. If you're willing to forfeit a modest fee for that right, recourse factoring might be for you.

Non-recourse factoring, on the other hand, provides a level of insurance on the credit you've extended to the customer. Once you've received the advance payment, the risk that the customer won't pay now lies with the factor. So, if the recent financial instability of a customer is prompting questions about their viability going forward, you may turn to non-recourse factoring to capture at least a portion of an invoice. At the same time, if a financially solid customer habitually drags their feet on keeping accounts timely, handing an invoice over to a firm that specializes in collections might help alleviate stress on your end.

Consider all variables

Along with the specific situations that different invoice factoring agreements covers, the credit a factor will extend to you is another important variable. That credit limit reflects the overall creditworthiness of your customers and the soundness of your business as well.

Ultimately, your factoring decision hinges upon how you weight the potential risks against the advantages your company may gain if it chooses to convert an outstanding invoice into cash. The key is to ensure your choice is a good fit for the financial position your business is in and the level of risk you're able to take on.


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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.