Recourse & Non-Recourse Factoring: Is It Really Worth It?

Navigating your business’ finances can be daunting. This is especially true for small and medium-sized businesses looking to make strategic investments, expand product lines, and pay down debt. 

There are several funding options available, some more reliable and consistent than others. 

Invoice factoring, for example, is a loan option that some businesses may consider for an influx of money. Within the umbrella option of invoice factoring, there are two main types: recourse and non-recourse factoring—each with its own set of benefits and drawbacks. 

Of course, it’s important to consider that recourse and non-recourse factoring lend themselves to more traditional structures that can be viewed as outdated and lacking. In this regard, many businesses find that it’s best to forego this option and opt for alternative solutions like Silo Capital.

Regardless, this article aims to explore these two financing methods, offering an understanding of how they work and whether they’re worthwhile to support your company and market goals. 

What is recourse factoring?

Recourse factoring is a financial arrangement in which a business sells its invoices to a factoring company at a discount. This type of lending agreement is also called “accounts receivable factoring”. 

Businesses receive cash immediately, which can be used to cover operating expenses like payroll. 

This type of factoring is ‘recourse’ due to the fact that, if the business seeking funding falls into debt or fails to make a payment on the unpaid invoice for any other reason, it’s responsible for buying it back. Essentially, the risk of payment failure falls on the shoulders of the business rather than the factoring company. 

What is non-recourse factoring?

Non-recourse factoring sees businesses selling their invoices to a factoring company without the obligation to buy them back if customers fail to pay. 

This type of factoring shifts the risk of credit default from the business to the factoring company. To protect their assets, factoring companies conduct thorough evaluations and credit history checks to mitigate possible credit risk. This type of factoring provides a layer of legal liability protection against customer bankruptcy, offering a safer (but more expensive) option for businesses.

It’s also important to note that while non-recourse factoring companies exist, they are far more uncommon to partner with than recourse factoring companies.  

How recourse and non-recourse factoring differ

The primary difference between recourse and non-recourse factoring is who assumes the risk of non-payment. However, there are additional differences to consider.

Evaluation and credit risk

Since non-recourse factoring companies assume more risk if your customer does not pay their invoice, they also conduct more rigorous evaluations of creditworthiness. With non-recourse factoring, there’s a requirement for your customers to have a strong credit history.

Therefore, it’s typically easier to qualify for recourse factoring. While recourse factoring companies do look at payment history and credit, they’re often more forgiving or flexible.

Fee and payment structure 

Your business will pay more when working with a non-recourse factoring company. This is because they’re taking on all the risk. Additionally, since non-recourse factoring companies check your customer’s credit history more thoroughly, they’ll disburse funding at a slower rate and typically provide less upfront. 

In contrast, recourse factoring companies tend to provide businesses with access to capital faster and provide higher advance rates.

Legal liability and bankruptcy protection

Non-recourse factoring offers protection against customer bankruptcy, which is not often guaranteed with recourse agreements. 

Are recourse and non-recourse factoring worth it?

While factoring can provide necessary cash flow, it’s often viewed unfavorably by businesses due to high costs and the potential damage to customer relationships.

Both recourse and non-recourse factoring turn accounts receivable into operating expenses, impacting the bottom line. The dependence on such financing can mask underlying issues in a business’ model or market strategy, which can negatively impact strategic management and payroll in the long term.

An alternative option: Silo Instant Pay

Fortunately, there are alternatives to traditional factoring that offer a more strategic approach to financing and funding. 

One such choice is Silo Capital, which provides small and medium-sized businesses with a cost-effective, flexible, and discreet alternative to banks and factoring companies (that often favor large corporations anyway). 

Silo offers tailored financial products without the restrictive conditions of conventional loans. Unlike factoring, Silo allows you to maintain complete control over your customer relationships, acting as a partner that supports your business behind the scenes.

Our customized solutions are designed to meet the unique needs of your business, allowing it to scale and grow. Silo understands how challenging it can be to secure loans with collateral, which is why our products are meant to be accessible. 

Silo’s Capital Solutions include Instant Pay and Cash Advance. They represent modern, dynamic solutions that adapt to your business’ growth, allowing you to take advantage of market opportunities. With Silo, businesses can strengthen supplier relationships, explore new markets, and invest in development worry-free and without the stress of dealing with external parties.

“We like everything about Silo - the people, the collaborative attitude, and the solutions themselves. They are great.” - Ryan Rawson, Two Ocean

Check out this case study on how Silo’s partnership with Carcione helped accelerate growth and re-disk their expansion journey.

Invest in sustainable growth with Silo and redefine your business’ trajectory, ensuring steady, scalable growth in an otherwise fluctuating market. 

Book a demo today!