Recourse vs. Non-Recourse Factoring: Your Liability Explained

Recourse Factoring: How Your Liability Works

In recourse factoring—the most common type—you retain ultimate responsibility if your customer doesn't pay the factored invoice. The factor advances you money immediately, but if your customer doesn't pay within the recourse period (typically 90 days from invoice date), the invoice is 'charged back' to you.

A chargeback means:

- The factor reverses the advance (deducting from your reserve or future advances)

- You receive the unpaid invoice back and must collect it yourself

- You've effectively borrowed the advance amount and now must repay it from other funds

Recourse factoring is cheaper (0.5%–1.5% lower fees than non-recourse) and available from more factoring companies. It's the right choice when your customers are creditworthy and unlikely to default.

Non-Recourse Factoring: What You Actually Get

Non-recourse factoring sounds like full protection against customer non-payment, but the reality is more nuanced. Most non-recourse agreements only cover credit default—meaning your customer's insolvency, bankruptcy, or inability to pay due to financial failure.

What non-recourse typically does NOT cover:

- Invoice disputes ('We didn't receive the goods correctly')

- Returns or quality claims

- Customer deducting credits or chargebacks

- Administrative non-payment (invoice not received, wrong PO number)

- Slow payment that doesn't rise to the level of insolvency

In other words, non-recourse protects you against your customer going bankrupt. It doesn't protect you against your customer refusing to pay a disputed invoice.

Read the non-recourse definition in your specific contract carefully—what events trigger it matters enormously.

Which Should You Choose?

Choose recourse factoring if:

- Your customers are large, established businesses with strong credit histories

- Your default rate is historically low

- Cost is a primary concern

- You're willing to manage chargeback risk internally

Choose non-recourse if:

- You're invoicing smaller, less financially stable customers

- Your industry has higher-than-average customer default risk (some oilfield services, for example)

- You want a cleaner balance sheet (non-recourse factoring is often off-balance-sheet)

- Peace of mind against catastrophic customer failure is worth the premium

For most businesses invoicing Fortune 500 companies, government agencies, or established mid-market companies, recourse factoring is the economically rational choice. The risk you're paying to eliminate with non-recourse is already very low.