When shopping around for the best accounts receivable financing options for your business, you will encounter a lot of finance-specific jargon, such as recourse and non-recourse factoring. Both terms are types of factoring, or A/R financing, which will impact your bottom line and any contracts you make with a factoring company. So, it is vital to understand the terms and differences to choose the right type for your company’s needs.

Factoring Basics

In invoice factoring, also called accounts receivable financing, you are selling assets, your invoices, to a company called a factor. This company usually pays for invoices in two installments, a portion upfront referred to as an advance, and the rest after the client has paid their account. The factor will charge a small fee, usually less than five percent on the invoice value, which is taken out of the second installment or the reserve. The answer for who is liable for the amount of the invoices if your customers fail to pay on them depends on whether you have full or non-recourse factoring.

Recourse Factoring

If a factor offers you full-recourse factoring, your company will be liable for the total amount of the invoice, plus applicable fees, if your customer does not pay. This liability means that you will have to repay the amount given to you for the advance and the factor’s fees, either through having your reserves debited, refunding the factor directly, or replacing the defaulted invoice with one that has the same value in good standing.

Non-Recourse Factoring

Non-recourse factoring is not the exact opposite of full-recourse factoring, a fact businesses can easily mistake. In this type of financing, your company is still liable for the amount of the invoice plus applicable fees if the customer does not pay unless the customer can prove insolvency during the factoring period. The factoring period is typically ninety days from when the factor buys the invoice, and the insolvency will usually need to be declared, such as closure or bankruptcy.

When you are looking into accounts receivable financing for your business, it is crucial to understand the differences between the types of factoring. This understanding means knowing the specifics of full and non-recourse factoring and which option factors in your industry are offering your company. Knowing who is liable for the invoice amount if a customer does not pay can also help you determine which accounts receivable to use.