Recourse factoring versus non-recourse factoring

What your factoring company may not be telling you about your Non-Recourse invoice factoring credit facility.

By: Michael Pickels 

It is a popular misconception, promoted by those in the know, that non-recourse financing transactions common to the Invoice Factoring and Asset Based lending industries are a virtual magic pill for credit concerns.  Unsuspecting entrepreneurs are lead to believe that they will not be liable for any losses incurred should their debtors fail to remit payment to the lender under a non-recourse financing arrangement or factoring line.  Often they are convinced to pay a bit more for this non-recourse service over a more typical recourse financing transaction.  After all, for a growing business the offer of freedom from worry about the payments of their customers and the ability instead to focus on the sales, health and longevity of the company could be likened to the discovery of Business’s Holy Grail.  What business owner wouldn’t want this service?  

The sad fact though is that this is not the case.  While a Factoring Company’s underwriter may tout the benefits of the service, the devil is truly in the details.  As it turns out, non-recourse lines only cover very specific instances of non-payment.  Most often non-recourse deals coverage is limited to actual bankruptcy filings by the debtor companies.  What this means is that the lender is really only at risk of liability for the lack of payment if they’ve allowed a company on the verge of bankruptcy to run up a large balance on their client’s books.  Not a smart move, and they know this.  Consequently it is in the Lender’s best interests to be very conservative when establishing the credit limits for their Client’s debtor companies.  In the end a service that was sold as a “small price to pay” for peace of mind ends up being of little or no real benefit and often actually impedes the Client’s growth due to the overly conservative credit constraints imposed by the lender in an effort to better their interests by mitigating their credit exposure.

The factoring industry has gotten a bad rap in years past for high rates and less than truthful marketing efforts.  Don’t be discouraged if you’ve been approached with a non-recourse deal, weigh your options carefully.  Find out everything you can about your potential financial partner.  Most importantly ask for references.  There are invoice factoring companies out there who will be upfront and honest in their description of services and the rates you’ll be charged.  If you think you’re being taken for a ride you’re best advice would be to take a step back and call a few other factoring companies for a comparison.  If you’re already factoring don’t forget to price shop.  Accounts Receivable Finance is a very competitive industry and you’d be surprised how far your lender may go to keep you. 

Michael Pickels is the COO for Business to Business Capital Corp –  America’s Friendliest Factor. Please visit BTB Capital Corp at http://www.btbcapital.com to receive a no cost, no obligation proposal for factoring or contact us.