There are two different types of factoring available to business owners, those being recourse factoring and non-recourse factoring. It’s good to know the difference between these two forms of invoice factoring, so you can be sure what you’re getting into when you become involved with factoring.

How Recourse Factoring Works

With recourse factoring, the agreement you make with a factoring company leaves you responsible for re-purchasing any particular invoice which your customer does not pay, regardless of the reason for that non-payment. This is the most common form of invoice factoring in use today, because it protects the alternative lender against such non-payments by customers.

The reason this kind of non-payment doesn’t happen frequently is that any good factoring company will generally conduct some research into the payment habits of your customers before agreeing to a factoring arrangement. If it’s found that a number of customers don’t pay promptly, it’s not likely that a factoring company will enter into an agreement with you.

How Nonrecourse Factoring Works

In this form of invoice factoring, when one of your customers doesn’t pay an invoice, the factoring firm is obliged to absorb a loss for the face value amount of that invoice. When invoice factoring first started up, it was always of the non-recourse variety, but that has changed over the years to protect factoring companies against such losses.

While this type of factoring is not nearly as common as recourse factoring, it is still offered by some alternative lenders. In addition, some factoring firms will agree to absorb the loss of a non-paying customer in the event that that customer was forced to declare bankruptcy. This provides at least some protection for the business owner when customer invoices go unpaid.

Interested in Factoring for Your Business? 

Factoring can be a great way of getting immediate cash in your hands for any business purpose. If you’re interested in factoring, please contact us at Star Capital USA to discuss how we can help you get set up so you can start realizing some of the benefits of factoring.