What is the difference between recourse and non-recourse factoring?

How do recourse and non-recourse factoring compare?

Factoring itself is the sale of your delivered invoices to a factor, which pays you most of the amount now and collects from your customer. The Comptroller of the Currency describes factoring as the direct purchase of third-party accounts receivable at a discount, with the factor focusing most of its due diligence on the customer, not the client who sold the invoice. For how the full cycle works, start with how freight factoring works.

What does recourse mean, and when does it come back to you?

Recourse means the factor can come back to you if the invoice goes unpaid. In practice that usually means one of two things. You replace the unpaid invoice with another one, or you repay the advance you received (plus whatever fees the contract sets).

Recourse is not a penalty. It is how the risk is divided. The factor is paying you cash before your customer has paid anyone, so the contract decides who is left holding the loss if the customer never does. With recourse, that is you.

Read the contract for these:

• How long before an unpaid invoice is treated as a recourse event.
• How you settle it: a charge to your account, a deduction from your reserve, or a deduction from your next invoices.
• What fees continue to run on an invoice you have to repay.

What does non-recourse usually cover, and what stays with me?

Non-recourse means the factor takes the loss, not that it takes every loss. The contract lists the covered events, and many contracts limit coverage to a customer's insolvency or bankruptcy. Everything outside the definition stays with you.

What usually stays with you under both structures:

• Disputes. The customer says the load was damaged, late, or short, and refuses to pay all or part.
• Short pays and deductions. A broker pays less than the invoice for any reason.
• Missing paperwork. The factor could not verify delivery.
• Cargo claims and chargebacks that reduce what the customer owes.
• Customers the factor did not clear, where the contract only protects cleared customers.

Example only. These numbers are invented and the terms are made up to show how the structures differ. You factor three $2,000 invoices at a 90% advance, so you receive $1,800 on each. Fees are left out to keep the picture simple.

The middle row is where people get surprised. They signed a non-recourse contract and assumed it covered a broker who simply would not pay. Whether it did came down to a definition they did not read.

Three things to check in any non-recourse contract:

1. The definition of non-payment. Insolvency only, or also long non-payment? After how many days?
2. Which customers are covered. Some contracts cover only customers the factor cleared in advance.
3. What is excluded. Disputes, short pays, and anything caused by your performance.

What does each one cost?

We do not state typical factoring rates, and providers set their own. What we can say is that the factor fee reflects the risk it takes, so non-recourse is often priced higher than recourse for the same invoices. That is a general pattern, not a rule, and the other terms in the contract can swamp the difference. Compare offers in total dollars per month, not the headline percentage, and include:

• The factor fee, flat or per period.
• The advance rate and reserve.
• Add-on fees such as wires, ACH, credit checks, and invoice submission.
• Monthly minimums and termination fees.

The calculator below handles the fee, the advance, and how long your customers take to pay. It uses only your numbers, and its defaults are examples, not market rates. It does not model recourse, chargebacks, or minimums, so treat the result as the fee side only and add the contract terms yourself.

Which one should I look at?

Neither is better in general. A few questions help:

• How much does one unpaid invoice hurt? If a single $2,000 invoice going unpaid would put you behind on a truck payment, the risk transfer in a non-recourse contract is worth understanding. Just confirm what it actually covers.
• How reliable are your customers? If you haul mostly for established brokers who pay, recourse may rarely come back to you. If you work with brokers you do not know, the covered events matter more.
• Are you a new authority? Factors lean on your customers' payment record more than your own history. See factoring with a new authority and the new authority hub.

Also read the rest of the contract. The notice of assignment tells your customers to pay the factor. Under the Uniform Commercial Code, after a customer receives a proper notification, paying you no longer clears its debt (UCC 9-406(a)). And Article 9 covers a sale of accounts, not just a loan secured by them (UCC 9-109(a)(3)), which is part of why factors file a lien on your receivables. A filing by one factor can block another, so tell every provider what is already on file.

The FTC's advice for small business financing is to read the contract, not the advertising, and to work out what you net after every fee against what you owe in total. Its examples include ads that said "no personal guarantee" while the contract had one. And a fee collected before a provider has issued terms is, in the FTC's words, "a cue to walk away."