Quick Overview
Recourse vs. non-recourse factoring is the choice between who absorbs the loss if your customer doesn't pay: with recourse, your business does; with non-recourse, Viva Capital does, but only when nonpayment is caused by the customer's insolvency or bankruptcy. Most Viva clients choose recourse factoring because it carries lower fees, typically one to five percent of invoice value, and higher advance rates.
As you review your invoice factoring options, two terms you’ll see are “recourse factoring” and “non-recourse factoring.” Understanding the difference between the two can help keep more money in your pocket and ensure your business receives the level of payment protection it needs. You’ll learn how they work and how to choose the right one for your business on this page.
How Factoring Works
Invoice factoring accelerates payment on your B2B invoices. Instead of waiting weeks or more for your clients to pay their invoices, you sell them to a provider of an invoice factoring service like Viva Capital instead.
You receive most of the invoice’s value right away. Although every company operates a bit differently, Viva offers advances of up to 100 percent of an invoice’s value and can even provide you with payment on the day you submit your invoice.
You’re free to spend the money however you wish. Many businesses use it for crucial expenses, such as payroll or inventory. Then, when your client pays their invoice, you receive the remaining sum minus a small factoring fee. Whereas anything between one and five percent of an invoice’s value is standard for recourse factoring, Viva Capital has rates as low as 0.25 percent for well-qualified clients.
You control which invoices you factor and how much you factor. Most businesses are approved, including newer businesses and those without a strong credit history, because factoring companies are more concerned with the creditworthiness of the entity paying the invoice – your client.
How Recourse and Non-Recourse Factoring Differ
No matter what you do, there is always some risk that your customer won’t pay their invoice. The invoice factoring types – recourse and non-recourse factoring – refer to which party accepts the risk of non-payment with a factored invoice.
What’s the Risk of Non-Payment?
Around four percent of a business’s receivables will become non-collectible on average, Sage reports. There are vast differences between industries and individual companies. For instance, top-performing organizations may write off less than one percent of balances due to bad debt, while others can hit eight percent or more.
Regardless of which method you select, factoring helps mitigate the risk to some degree. This is because factoring companies perform credit checks on your clients before factoring any invoices. That way, you know in advance how much credit your business can extend to a client without exposing your company to unnecessary risk.
Additionally, factoring companies collect the balances for you. At Viva Capital, we address this from a customer service standpoint, always ensuring your clients receive the best possible care and support. That means we follow up with them and make it as easy as possible for them to pay. This approach also accelerates payment from the client side and helps create stronger, more positive relationships that reduce the likelihood of non-payment.
Recourse Definition: What Is Recourse Factoring?
With recourse factoring, your business absorbs the loss if your customer doesn’t pay their invoice. This is the most common type of factoring, and it’s usually much more affordable.
Because you’ve already been paid for the invoice by your factoring company, you’re responsible for ensuring it’s paid back in some fashion. Each company has different guidelines. At Viva Capital, you can typically choose between one of the following:
- Your company buys back the unpaid invoice.
- You swap the unpaid invoice out for another of equal value.
- You deduct the amount from your reserve funds until it is paid in full.
Non-Recourse Definition: What Is Non-Recourse Factoring?
With non-recourse factoring, the factoring company absorbs the loss if your customer doesn’t pay their invoice, provided the nonpayment is due to your customer’s financial inability to pay, such as insolvency or bankruptcy. Non-recourse factoring tends to be more expensive because the factoring company is accepting the risk. It does not cover every reason an invoice goes unpaid. Disputed invoices, short pays over a service disagreement, or invoices that were never valid to begin with are still your responsibility to resolve, even under a non-recourse agreement.
There’s no process here like there is for recourse factoring. You can usually continue factoring as you normally would, though invoices for the non-paying client’s invoices will be ineligible for factoring.
Hybrid Definition: What Is Hybrid Factoring?
Hybrid factoring fuses recourse and non-recourse factoring. Each company handles it differently. In some cases, you can alternate between recourse and non-recourse factoring. Other times, a certain percentage of an invoice qualifies for non-recourse factoring, and any value over the determined amount is treated as recourse factoring.
What Non-Recourse Coverage Looks Like for Carriers
At Viva Capital, non-recourse factoring covers a customer’s failure to pay for a covered reason, such as the customer filing for bankruptcy or otherwise becoming insolvent during the invoice’s credit period. It doesn’t cover every scenario a carrier runs into on the road. A few examples make the distinction clearer:
- Shipper Insolvency: A shipper you’ve hauled for files for bankruptcy before paying an outstanding invoice. This is a covered event under non-recourse factoring, and Viva absorbs the loss.
- Disputed Freight Invoice: A broker refuses to pay because of a claimed shortage, damage, or late delivery. Because the customer is disputing the invoice rather than being unable to pay it, this falls back to you as the carrier to resolve, even under a non-recourse agreement.
- Delayed Payment: A customer is simply slow to pay but pays eventually. This isn’t non-payment at all, so it doesn’t trigger non-recourse coverage or repurchase obligations either way.
If you haul freight and want to know exactly which of your accounts would qualify for non-recourse coverage, our transportation factoring team can walk through your customer mix before you decide between recourse and non-recourse.
Recourse vs. Non-Recourse Factoring at a Glance
| Recourse Factoring | Non-Recourse Factoring | |
| Covered Events | None. Your business is responsible for any unpaid invoice, regardless of the reason. | Customer insolvency or bankruptcy during the invoice’s credit period. |
| Exclusions | Not applicable; all nonpayment risk stays with you. | Disputed invoices, short pays, and invoices that were never valid to begin with. |
| Typical Cost | Lower fees, generally one to five percent of invoice value. | Higher fees, since the factor is absorbing more risk. |
| Responsibility for Unpaid Invoices | You buy back, swap, or cover the unpaid invoice from reserves. | Viva absorbs the loss for covered events; you remain responsible for excluded reasons like disputes. |
Exact eligibility and coverage terms are confirmed during underwriting and vary by client file.
Recourse vs. Non-Recourse Factoring: Which Is Better?
Neither recourse nor non-recourse factoring is better. Because there are pros and cons to each type of factoring, it’s more a matter of choosing the best solution for your needs.
When Recourse Factoring May Be Better
You may feel like recourse factoring is a better fit for your business if:
- Your clients are reliable. There’s minimal risk of non-payment, and you’re comfortable absorbing the loss if someone doesn’t pay.
- You want lower fees. Recourse factoring is less expensive because the factoring company is accepting less risk.
- You want higher advance rates. Because there’s less risk for the factoring company, you can usually receive significantly higher advances with recourse factoring.
When Non-Recourse Factoring May Be Better
You may feel like non-recourse factoring is a better fit for your business if:
- Your clients aren’t always reliable. Perhaps your industry is volatile, or you have concerns that specific customers may not pay within the required timeframe or may not pay at all. Non-recourse factoring can provide you with peace of mind.
- You can’t afford any risk of non-payment. Businesses operating with tight margins sometimes prefer non-recourse factoring because it ensures the company can keep moving forward without concern over adjusting budgets or running short on cash.
Get a Complimentary Invoice Factoring Quote from Viva Capital
Most businesses we work with at Viva Capital prefer recourse factoring because it keeps more cash in their pockets and allows them to maximize their advances. However, we also offer non-recourse factoring in certain situations. For instance, our transportation factoring clients may choose either type. If you’d like to learn more or get started, request a complimentary rate quote.
FAQs About Recourse and Non-Recourse Factoring
What’s the difference between recourse and non-recourse factoring?
With recourse factoring, your business is responsible for an unpaid invoice no matter why the customer didn’t pay. With non-recourse factoring, the factoring company absorbs the loss, but only when nonpayment is due to the customer’s financial inability to pay, such as insolvency or bankruptcy.
Does non-recourse factoring cover every reason a customer doesn’t pay?
No. Non-recourse factoring only covers nonpayment caused by the customer’s insolvency or bankruptcy. Disputed invoices, short pays over a service disagreement, and invoices that were never valid to begin with are still your responsibility, even under a non-recourse agreement.
What is transportation invoice factoring?
Transportation invoice factoring lets trucking companies sell unpaid freight invoices for immediate cash instead of waiting on broker or shipper payment terms. Carriers can choose recourse or non-recourse coverage depending on how much nonpayment risk they want to hold themselves.
How fast do transportation factoring companies fund invoices?
Most transportation factoring companies fund approved invoices within 24 to 48 hours, and several, including Viva Capital, offer same-day funding once your account is set up.
What’s a common mistake trucking companies make when choosing between recourse and non-recourse factoring?
A common mistake is assuming non-recourse factoring removes all nonpayment risk. It only covers insolvency-related nonpayment, so carriers who don’t screen brokers and shippers for reliability can still end up covering disputed or invalid invoices themselves.
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