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Recourse Factoring vs. Non-Recourse Factoring: The Essential Guide

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Small businesses that sell on credit sometimes need to sell unpaid invoices to access immediate working capital and solve cash flow problems using accounts receivable factoring. However, there are many types of factoring.

Choosing the right factoring agreement requires knowing how each process works. We can help you navigate the choice between recourse and non-recourse factoring with answers to these questions:

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    What is Accounts Receivable Factoring?

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    Accounts receivable factoring is when a business sells unpaid invoices for an immediate cash advance. It’s also called invoice factoring or factoring receivables. Sometimes you might see it called invoice financing or accounts receivable financing, although those are generally broader terms that include different funding arrangements.

    With invoice factoring, ownership of the invoices transfers to the company purchasing them, known as the factoring company or factor. The factor purchases the invoices at a discounted rate, issues the cash advance, and then collects on the payment.

    Let’s look at an example.

    Accounts Receivable Factoring Example

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    The XYZ Company has a factoring agreement with the following terms:

    • Discount rate: 3%
    • Advance Rate: 95%
    • Factoring fee: 2%

    The company’s customers must pay within 30 days of receiving the invoice. XYZ currently has $25,000 in accounts receivable that it wants to factor.

    It sends the invoices to the factoring company, which then runs credit checks on the customers. If approved, it purchases the accounts receivable but applies the 3% discount to purchase them for $24,250.

    The factor issues a cash advance to the XYZ company at the advance rate of 95%, for a total of $23,038. The remaining $1,212 goes into a reserve account until the customer pays off the invoice amount, which it now owes to the factoring company.

    Assuming customers pay off in time, the factoring company applies the 2% factoring fee, which comes out to $500, which it takes from the reserve amount. The factor then issues the remaining $712 to XYZ Construction.

    What is Recourse Factoring?

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    Recourse factoring means the factoring company can make a comapny repurchase factored invoices if the customer does not pay. It’s the most common form of invoice factoring.

    The company makes every effort to collect payment from the customer in recourse factoring. But if an outstanding invoice becomes bad debt, the factoring company passes that bad debt back to the business that sold the invoice.

    The company that initially factored the invoice must collect it from the customer. In some cases, it might be necessary to sell the bad debt to a collections agency to get some value out of it.

    The factoring company assumes less risk with recourse factoring, which provides a few advantages. It’s easier to qualify for recourse factoring, and there are few limitations on what invoices a business can factor.

    Recourse factoring agreements typically have looser terms and conditions. Also, since the factoring company is taking less risk, it typically offers cheaper rates and higher advances.

    Your business should consider recourse factoring if your customers are reliable and already have processes to run credit checks. The only risk with recourse factoring is if your customers don’t pay. Recourse factoring is the better option if you’re confident in their creditworthiness.

    Recourse Factoring Pros & Cons


    • The most common form of factoring.
    • Lower qualifications.
    • Less expensive.
    • More flexible advance rates.
    • More flexible contracts.


    • More of a risk if a customer doesn’t pay.
    • It could impact cash flow if you have to purchase.

    What is Non-Recourse Factoring?

    Non-recourse factoring means the company assumes the credit risk if a customer doesn’t pay for specified reasons. The non-recourse factoring agreement outlines when the factoring company is responsible for non-payment and when it can force the repurchase.

    Companies that use non-recourse factoring can expect to pay higher fees with lower advance rates. In addition, the approval requirements are more stringent.

    Most factoring companies that provide non-recourse factoring maintain a credit check process. Each time a company submits an invoice, the business that owes the invoice amount must pass the credit check.

    Non-Recourse Factoring Limitations

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    Every factoring company that offers non-recourse factoring applies different rules. Some stipulate that they only assume credit risk in the case of bankruptcy or insolvency.

    Other factoring companies have broader rules but exclude bad debt invoices in certain situations. Some of the common exclusions for non-recourse factoring include:

    • Invoices that didn’t go through the factoring company.
    • Disputes over invoices.
    • A breach of contract.
    • If the company selling invoices contributed to the credit problem.

    Since the factoring company assumes more risk, it charges higher fees and offers a lower advance rate. Getting approved is more difficult as the factoring company runs a credit check on your customers before approving invoices.

    Non-Recourse Factoring Pros & Cons


    • The factoring company handles your collections.
    • You only have to buy back bad debt in certain cases.


    • More expensive than recourse factoring.
    • More difficult to get approval.
    • Only available for certain companies.

    Is Recourse or Non-Recourse Factoring better?

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    Choosing between recourse and non-recourse factoring comes down to your relationship with your customers. If you have a solid relationship and your customers pay on time, then recourse is the better choice. For riskier customers with poor payment histories, non-recourse factoring makes the most sense.

    Questions to ask yourself when deciding include:

    How can I qualify for Accounts Receivable Factoring?

    Since factoring depends more on your customers’ credit than yours, qualifying is easier. Some factoring companies don’t have minimum qualifications as long as you have a verifiable invoicing process.


    In general, approved companies meet the following minimum qualifications:

    • Credit score of 550+.
    • In business for at least 1 year.
    • $250k+ in annual revenue.

    How to apply for Invoice Factoring:

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    You can apply for accounts receivable factoring through United Capital Source. Follow these instructions to apply for receivables factoring.

    Step 1: Make sure your customer is reliable

    Factoring invoices only works when your customers pay their invoices on time and in full. Ensure your customers will pay before contacting a factoring company.

    Step 2: Gather your documentation

    When you apply, the factoring company needs to review the following documents:

    • Driver’s license.
    • Voided business check.
    • Banks statements from the previous three months.
    • Business tax return.
    • Accounts receivable aging report, Accounts payable report, debt schedule.

    Step 3: Apply

    You can complete our one-page application or give us a call to apply. Either way, you’ll need to provide the information above and the invoice amount you want to sell.

    Step 4: Speak to a representative

    Once you apply, one of our representatives will reach out to discuss the factoring fee, factoring rate, and terms attached to the sale. You’ll get an upfront breakdown of all costs, so you don’t have to worry about hidden fees.

    Step 5: Receive approval

    The entire process takes about two weeks to finalize. Funds will appear in your bank account 1-2 days after completing the application.

    Frequently Asked Questions

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    Here are the most common questions about non-recourse factoring.

    What is Notification Factoring?

    Notification factoring is when the factoring company alerts your customers when it buys their invoices. If you don’t want your customers to know you sold their invoices, look for a company that doesn’t require notification factoring.

    What if I’m declined for Invoice Factoring?

    If you were declined, it’s likely that your customers didn’t meet the credit requirements. There are other options for small business financing if accounts receivable factoring doesn’t work for you.

    Small Business Loans

    Small business loan options include:

    Non-Recourse Factoring – Final Thoughts

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    Non-recourse factoring is best for startups, newer companies, or those with unreliable or unproven customers. Small business owners who know and trust their customers can save more money and have more flexibility with recourse factoring.

    You can contact us to learn more about accounts receivable factoring for your business.

    We will help you grow your small business.

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