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The practical difference between recourse and non recourse account receivable factoring
Perhaps the most misunderstood language dealing with accounts receivable factoring is that concerning recourse. The basic concept of factoring is pretty easy to understand. Company A delivers goods or services to Company B and invoices Company B for them. The factoring company then buys this invoice from Company A for a discounted rate, immediately depositing this amount in Company A’s bank account. After a due period of time, Company B pays the factoring company the full amount of the invoice. Company A is happy because it got paid immediately, Company B is happy because it received its goods or services. The factoring company is happy because it made money on the transaction (the difference between the discounted rate it paid Company A, and the full invoice amount it was paid by Company B.) In a perfect world that would be the end of things.
In reality however, there are occasions when Company B does not pay the factoring company in a timely fashion. It is at this point that the concept of recourse and non recourse comes into play. The most common mistake people make with accounts receivable factoring is in understanding what recourse and non recourse actually mean.
Factoring with recourse is the clearer of the two in that it means what it says: if Company B does not pay the factor in a timely fashion (usually within 90 days), then recourse kicks in and Company A owes the factoring company the full amount of the invoice. The usual mistake is to believe that factoring without recourse means that if Company B fails to pay the factoring company, then Company A is off the hook. This is not the case. What factoring without recourse means in practice is that if, and only if, Company B cannot pay the factor because they are insolvent, then Company A is off the hook.
Since an insolvent company is one that cannot pay its debts (basically the company is bankrupt, whether or not they’ve actually filed for bankruptcy, companies that are slow payers are not covered by non recourse language in factoring agreements.
If you have other questions about accounts receivable factoring, or want to get started with factoring, please click here and fill out the inquiry form—an IFG representative will get in touch with you shortly. We invite you to ring us as well at 1 300 957 900. We look forward to hearing from you.