Last Updated July 30, 2025
In order to survive in today’s competitive market and ultimately generate a competitive edge, a company must weigh the short-term and long-term implications of various funding solutions, one of which is invoice factoring.
Factoring can prove a great way for small business owners to improve cash flow. But before partnering with a factoring company, there are it’s important to familiarize yourself with the two types of factoring: recourse and non-recourse.
This article provides a comprehensive overview of recourse vs. non-recourse factoring.
What Is Factoring?
Before diving into the types of factoring, let’s quickly overview how the factoring process works. Keep in mind this process is the same regardless of whether you’re factoring with recourse or without recourse.
Invoice factoring occurs when a business, after invoicing its customers, sells the outstanding accounts receivable to a third-party factoring company (also known as a “factor”). The factor then advances up to 90% of the value of each invoice to the business, this typically occurring within 24 hours. Through this process, the business receives money immediately, rather than waiting for the customer (their debtor) to submit payment. When the customer is ready to submit payment, they’ll forward those funds to the factoring company instead of the business they owe.
The parties involved in a factoring agreement neither acquire nor issue debt as part of the transaction. Hence, factoring can’t be considered a loan.
Consequently, invoice factoring has become a hugely popular alternative form of financing. It has proven to be crucial for countless small and medium-sized enterprises (SMEs) by fostering entrepreneurial ventures and greatly strengthening economic growth.
Business owners that factor their invoices have a far more predictable cash flow because you know you’re getting paid for your services provided within 24 hours. If working on net payment terms such as net 15, net 30 or net 60, you’re likely going to be waiting weeks to receive payment. And you might be surprised at how often invoices are paid late—recent data shows that 73% of SMBs are regularly impacted by late payments.
What Is Recourse Factoring?
With recourse factoring, the client is held responsible if their debtor fails to pay the factoring company.
If your liable customer fails to pay within some specified period, the factoring company may charge the invoice back to you or you can replace it with another good unfunded invoice. The factoring company effectively shifts the risk of non-payment to you.
So when accounts receivable is factored with recourse, it just means that the client is responsible for covering unpaid customer invoices, not the factor.
Advantages of Recourse Factoring
Factoring with recourse is the more common of the two types of factoring, with several advantages:
- It’s the cheaper option due to smaller factoring fees.
- Faster approval process than non-recourse factoring.
- Stimulates greater business cash flow due to more cashback from invoices.
- The factor still credit checks and verifies new customers to minimize the risk of defaults.
- The factor may avail options to help cover the cost of recourse on the client’s part.
- It leaves no debt on the client’s balance sheet as it isn’t a loan.
Disadvantages of Recourse Factoring
Nobody wants to take a blind pick without a clear picture of the downsides. So, here’s a highlight of the few prominent downsides:
- The client (your business) is held liable for non-payment, so you must cover the funds in case of failed debtor payment
- If you fail to settle the default promptly or offset it with a good invoice, it could take a toll on business income and bank accounts.
What Is Non-Recourse Factoring?
With non-recourse factoring, the factoring company will take on the liability of non-payment by the client’s debtors. Many factoring companies do not offer non-recourse factoring.
Factoring companies will typically incur higher fees for clients who choose to factor without recourse. So while it might be nice not to be responsible for debtor non-payment, over time, non-recourse factoring might become the more expensive option do to added fees. According to altLINE VP and General Manager Jim Pendergast, it’s pivotal for business owners to realize this before assuming non-recourse factoring is the clear winner.
“On the surface, it’s easy to see the definition of non-recourse factoring and think it’s better than recourse,” Pendergast said. “But the factoring companies that offer non-recourse factoring will protect themselves in ways such as charging you higher factoring fees and turning away more of your potential customers.”
Typically, most factoring companies offer this option in the exclusive case of debtors who declare bankruptcy. Still, such debtors must have good credit ratings to be considered. While the factoring company gives a credit guarantee that they are responsible for collecting your invoices, there’s no warranty that you are hedged against products or services disputed by clients.
Advantages of Non-Recourse Factoring
On the upside, non-recourse factoring is characterized by:
- High level of bad debt protection for the client
- The factor is tasked with credit checks and in-depth verification of invoice clients to minimize the risk of defaults.
- Still relatively easy to get funding compared to alternatives like a business line of credit (LOC)
Because the factoring company will be assuming that risk on your behalf, many factors engaging in non-recourse factoring agreements with your business will run commercial credit reports on your debtors through one of the major commercial credit bureaus: Experian, Dun & Bradstreet, and Equifax. This helps them establish your current clients’ financial standing and better identify the customers who could potentially be a greater risk for slow or non-payment of invoices.
Disadvantages of Non-Recourse Factoring
Of course, the added protection from non-recourse factoring is not without its disadvantages.
- Greater chance of new debtors being turned away by the factoring company. Since the factor is assuming the risk if a customer doesn’t pay for a qualified reason, it is in the factor’s best interest to only approve factoring invoices they feel confident clients will pay.
- Factoring companies will likely charge a higher rate for factoring, since they need to be able to cover themselves from unpaid invoices.
- The factoring company will seek to ensure their protection by placing reduced limitations on factoring line size.
- Because of the greater potential risk to the factor, non-recourse factoring lines are monitored with scrutiny and subject to reduction or end of credit as a preemptive measure.
Differences Between Recourse vs. Non-Recourse Factoring
If you’re still not sure what the differences are between recourse vs. non-recourse factoring, check out the summary table below:
| Recourse Factoring | Non-Recourse Factoring | |
|---|---|---|
| Who Has the Liability of Non-Payment? | The client | The factor |
| Advance Rates | Typically higher | Typically lower |
| Cost | Typically costs less | Typically costs more |
| Speed of Approval | Typically faster | Typically slower |
| Which Is Best for Me? | Recourse factoring is typically better for clients with reliable customers and those who want lower factoring fees. | Non-recourse factoring is typically better for those with a higher risk of bad debt due to less reliable or riskier customers. |
Example: Recourse vs. Non-Recourse Factoring
To provide an illustration of recourse vs. non-recourse factoring, let’s imagine a trucking business, “Mike Anderson Trucking LLC,” has a new shipper, ABC Groceries, on net 60 payment terms. ABC Groceries pays on Day 57 of the first payment cycle, causing Mike Anderson Trucking to suffer some serious budget problems. However, the two parties want to continue working together, if possible, as the shipment was hauled swiftly and both sides enjoyed working with one another.
As a solution, the owner, Mike Anderson, partners with altLINE and chooses to factor his freight invoices.
He does this in hopes of boosting his trucking company’s cash flow, prevent working capital shortages down the line, and to ultimately stabilize his finances. He and altLINE contractually agree to factor with recourse, meaning ABC Groceries will submit invoice payments to altLINE moving forward. Since he’s factoring with recourse, rates and fees are a bit lower than they would be in a non-recourse agreement.
Unfortunately, ABC Groceries repeats the cycle of not paying on-time. Only this time, they not only fail to meet payment terms; they fail to pay the invoice entirely.
Because Mike Anderson Trucking factored with recourse, they will be the party held liable for the failed payment. altLINE understands that this was out of the trucking company’s control, so the two parties work together to help find an optimal solution in the interim until payment is made. However, if payment is never submitted by ABC Groceries, Mike Anderson Trucking will ultimately be required to pay-back altLINE for the total amount of the cash advance that was provided.
In Summary: Recourse vs. Non-Recourse Factoring
A client should engage in a detailed discussion with a reputable factor on the latter’s terms regarding recourse vs. non-recourse factoring. And generally, to incur lower fees and worry less about risks, the best option is to ensure debtors have solid payment histories and impressive credit ratings.
Both full recourse and non-recourse types of invoice factoring have advantages and disadvantages to the business seeking to engage a factoring company. Overall, non-recourse factoring offers an additional sense of protection against clients defaulting on invoices owed to the factor due to customer insolvency, but it often comes with a higher price and limitations.
Recourse vs. Non-Recourse FAQs
What does it mean when accounts receivable is factored with recourse?
When accounts receivable is factored with recourse, it means the business using invoice factoring is liable for their customer failing to pay the invoice, not the factoring company. This differs from non-recourse factoring, where the factor is liable for any missed payments.
What is full recourse factoring?
With full recourse factoring, the client bears responsibility for their customer not paying an invoice to a factoring company. Full recourse factoring can be used interchangeable as factoring with recourse.
Which is more common between recourse factoring vs. non-recourse factoring?
Recourse is more common than non-recourse factoring. Many factoring companies are weary of non-recourse as it means they are liable for debtor non-payment.
Still, there are many advantages to working on a recourse agreement for business owners. For one, advance rates are usually higher. Plus, approval times are generally quicker. You also get the benefit of all of your debtors being credit checked, which can assist you in the long run with identifying potential problem customers.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.
