Recourse vs non-recourse factoring: who carries the risk

What recourse and non-recourse mean

Recourse and non-recourse factoring describe where the credit risk of an unpaid invoice sits. In recourse factoring, the business remains responsible for the debt if a customer fails to pay. The funder provides finance against invoices, but when an invoice remains unpaid after an agreed period, the business repays the funder, buys back the invoice or replaces it with another eligible invoice. The funder's credit assessment and credit limits still matter, because they determine which invoices are eligible for finance. The recourse period is a contractual term. It sets how long the funder waits after the due date before requiring the business to reverse the advance. The period can be fixed or linked to invoice due dates and may differ by debtor. The business therefore carries the loss if the customer becomes insolvent or simply does not pay. In non-recourse factoring, the funder absorbs approved bad debts within agreed credit limits. The business is not required to repay the advance for an approved debtor that fails for a covered reason. The funder may charge a higher fee for that protection. UK Finance reports that over £20 billion of invoice finance and asset-based lending is provided to UK businesses at any one time.

The recourse period is central to how recourse factoring operates. It commonly starts from the invoice due date, although the contract may use a different trigger, such as the date of the advance or the date on which the funder notifies the business of non-payment. At the end of that period, the funder may require the business to repurchase the unpaid invoice, replace it with an eligible invoice, or repay the amount advanced. The mechanics vary between facilities. Some contracts give the funder a right to debit the business account, while others require a payment from the business. The business may also be required to provide a credit note or a replacement invoice. The contract defines what counts as non-payment and whether partial payment affects the recourse obligation. Non-recourse arrangements use similar mechanics for invoices that fall outside protection, but covered invoices are handled differently. The funder may make a claim under a credit insurance policy held in its name, or it may absorb the loss itself. The business can still face administration if an invoice is excluded, disputed or above an approved limit. The distinction between recourse and non-recourse is therefore not only about the label. It depends on the eligibility rules, credit limits, exclusions and the definition of a covered event.

What non-recourse actually covers

Non-recourse factoring is often described as protection against bad debt, but the protection is defined by the contract. The common covered events are customer insolvency and protracted default. Insolvency usually means a formal insolvency event, such as administration, liquidation or a company voluntary arrangement, as defined in the agreement. Protracted default usually means a failure to pay by a specified number of days after the due date, again as defined. The funder or its insurer applies those definitions when deciding whether a claim is valid. Non-recourse cover rarely extends to invoice disputes. If a customer disputes the goods, services, quantity, price or quality, the invoice may fall outside protection even if the customer is otherwise solvent. The business may then have to repay the advance or replace the invoice. The contract can also exclude certain debtors, countries, sectors or invoice types. Credit limits are part of the same structure. The funder sets a limit for each approved debtor, and protection applies only within that limit. An invoice above the limit may be partly protected, unprotected or eligible only for recourse finance.

Credit protection in non-recourse factoring is often provided by credit insurance held in the funder's name. The policy defines the insured events, the credit limits, the waiting periods and the exclusions. The business may not see the policy, but its terms can affect which invoices are protected. The funder may require the business to notify it of overdue accounts, disputes or known customer difficulties. Failure to follow notification or claims procedures can affect cover. The credit limit is not a general statement about the customer's creditworthiness. It is a contractual limit for the facility, and it can be reduced or withdrawn as the insurer's assessment changes. New or increased limits may require approval before invoices are issued or before they are uploaded to the facility. If a customer pays part of an invoice, the protected amount may reduce accordingly. If the customer is covered for insolvency but not protracted default, the business may wait longer for a claim. The definition of the covered event therefore matters as much as the headline label. A non-recourse facility can reduce credit risk for approved debtors, but it does not remove commercial risk, documentation risk or the risk of a disputed invoice.

Situations where the business still carries risk

Non-recourse factoring does not transfer every credit loss to the funder. The business can still carry risk where an invoice falls outside the protection. Disputes are a common example. If a customer alleges that goods were defective, services were not delivered, the price is wrong or the invoice does not match the purchase order, the funder may treat the debt as disputed rather than as a covered insolvency or protracted default. The business may have to repay the advance, replace the invoice or resolve the dispute before protection applies. The contract may define a dispute broadly and may allow the funder to act on the customer's assertion. Excess over a credit limit is another example. If the funder has approved a limit of a stated amount for a debtor, invoices above that limit may be unprotected. The business can also carry risk for unapproved debtors. Those are customers that the funder has not assessed or has declined to approve. Invoices to unapproved debtors may be eligible for recourse finance only, or they may be excluded from the facility. The business therefore needs eligibility checks before it relies on non-recourse cover for a particular invoice.

Other situations can also leave risk with the business. The contract may exclude invoices that are past their due date when uploaded, invoices with extended payment terms, or invoices to debtors in certain countries. It may exclude intra-group sales, sales to connected parties or sales where the business has not obtained proof of delivery. The funder may also require the business to maintain records and to notify it of any known dispute, default or insolvency event. If the business fails to follow those procedures, the funder may decline a claim. Concentration risk is relevant as well. If a large share of the debtor book sits with one customer, the credit limit for that customer may be the practical limit of protection. Invoices above the limit remain with the business. The same applies where a customer's limit is reduced after invoices have been financed. The business may then need to replace the protected invoices or accept recourse treatment. Non-recourse cover is therefore conditional. It depends on the debtor being approved, the invoice being eligible, the amount being within the credit limit and the loss falling within a defined covered event. The business can carry the residual risk even when the facility is marketed as non-recourse.

How costs differ

Non-recourse factoring usually carries a higher cost than recourse factoring because the funder or its insurer accepts a credit risk that would otherwise sit with the business. The additional charge is often described as a credit protection premium or a non-recourse fee. The contract may express it as a percentage of invoice value, a percentage of the funded amount, a flat charge per debtor or a combination of those methods. The exact basis varies, and the contract or tariff sets out how the charge is calculated. The premium may apply only to invoices that are within an approved credit limit and to debtors that the funder has approved. Invoices outside those parameters may attract recourse treatment or a different charge. The cost can also vary by debtor, country, sector or payment term. A funder may price the protection according to its assessment of the debtor's credit risk, the availability of credit insurance and the concentration of the debtor book. The business can compare the total cost of recourse and non-recourse options by looking at the service fee, the discount charge, the protection premium and any minimum charges. A headline rate alone may not show the full cost.

The timing and method of charging also differ. A protection premium may be charged at the point of invoice purchase, on the outstanding funded balance, or as a periodic charge. It may be deducted from the advance or invoiced separately. Some facilities include the premium within a single service fee, while others show it as a separate line. The contract may include minimum fees, renewal charges or charges for limit approvals. Those items can affect the comparison between recourse and non-recourse. The business can ask for a worked example based on its own invoice values and debtor limits. Such an example can show how the charge applies to an invoice within a limit, an invoice above a limit and an invoice to an unapproved debtor. The business can also check whether the premium is refundable if protection is not available or if a claim is declined. A non-recourse facility may carry more administration because credit limits and approvals are part of the process. The business can assess whether the additional protection is worth the additional cost for each debtor. The comparison is not only between headline fees. It includes the credit limits, the exclusions, the claims process and the cash flow effect of any recourse.

Which businesses use each

Recourse factoring is often used by businesses that want finance against invoices without paying for credit protection. It can suit businesses with a diversified debtor book, strong credit control and a willingness to carry the credit risk of their customers. It can also suit businesses that have invoices outside a funder's approved limits or debtors that the funder has not approved. Non-recourse factoring is often used where the business wants protection against approved bad debts within credit limits. It can suit businesses with concentrated debtor books, where a small number of customers accounts for a large share of sales. It can also suit businesses that operate in sectors with longer payment terms or higher credit risk. The choice depends on the debtor book, the contract terms and the cost of protection. The label does not determine eligibility. A business can use a non-recourse facility and still carry risk for disputes, unapproved debtors and invoices above limits. A business can use a recourse facility and still manage credit risk through credit insurance, credit checks and payment terms. The facility structure can be combined with other risk management tools.

Sector practice can influence the choice. Recruitment businesses often have concentrated debtor books because a few clients account for a large share of placements. They may use non-recourse factoring to protect against client insolvency within approved limits, while still carrying risk for disputes about timesheets, rates or placement terms. Construction businesses can have complex payment arrangements, including applications for payment, retentions and certification. A funder may treat an application for payment differently from a VAT invoice, and retentions may be excluded or financed only after certification. Non-recourse cover may be available for approved debtors, but disputes about works, variations or defects can fall outside protection. Recourse factoring can be used where the business retains control of credit risk or where the debtor book is diversified. Some businesses use a mixture: non-recourse for approved debtors and recourse for others. The contract can allow different treatment by debtor or invoice type. The business can review its sector's payment customs, the evidence required by the funder and the definition of a dispute. Those factors can matter more than the recourse label when a customer fails to pay.

Late payment rights alongside factoring

Factoring does not remove the business's rights under the Late Payment of Commercial Debts (Interest) Act 1998. The Act provides statutory interest on late payment of commercial debts and fixed compensation for the cost of recovering the debt. The statutory interest rate is 8% above the Bank Rate. The fixed compensation is set by the Act and is separate from the interest. The business can claim those rights where the contract does not provide a substantial remedy for late payment. The contract may include its own interest or compensation terms, and the Act's regime can be excluded where the contract provides a substantial remedy. The business can check the terms of its invoices and contracts. The rights can apply alongside a factoring facility. The funder may collect the debt in its own name or in the business's name, depending on the agreement. The business can ask how late payment interest and compensation are treated in the facility. The contract may allocate those sums to the funder or to the business. The position can affect the net recovery on an overdue invoice.

The Small Business Commissioner provides information and a complaints service for small business suppliers with payment problems. The service can help with late payment issues, but it does not replace the Act's statutory rights or the contract's terms. A business can use the Commissioner's guidance to understand payment practices and dispute resolution. The business can also check whether its customer is a public authority or a large business with published payment terms. Those factors can affect the practical route to recovery. In a factoring arrangement, the funder may handle collection and may have its own process for late payment claims. The business can ask who is responsible for serving a late payment notice, who keeps the interest and compensation, and how the sums are recorded. The contract may require the business to assign those rights to the funder. The business can check the notice requirements and the time limits. The Act's rights apply to commercial debts and can be claimed in addition to the invoice amount. They are separate from the factoring service fee, the discount charge and any credit protection premium. The business can review the interaction between the Act, the factoring contract and its own invoice terms.

Questions to check in the contract

Several contract terms determine how recourse and non-recourse operate in practice. The business can check the definition of a recourse period, including when it starts and what triggers the funder's right to require repayment or buyback. The definition of a covered event can be reviewed, together with the definition of protracted default, insolvency and dispute. The contract can set out the credit limits, the approval process for debtors and the treatment of invoices above a limit. The business can check the notice period for changes to limits, the process for notifying disputes and the evidence required for a claim. The contract can also set out the funder's rights if the business fails to provide information or if a customer reduces its payments. The business can review the buyback mechanics, including whether the funder debits an account or requires a replacement invoice. The contract can define the treatment of partial payments, credit notes and retentions. The contract can also set out how the funder applies payments and how it allocates them between invoices. Those definitions can affect the cash flow and the risk position.

Other terms affect cost and exit. The business can check the notice period for terminating the facility, the minimum term and any exit fees. The contract can set out the charges for debtor limit approvals, renewals and additional services. The business can ask whether a personal guarantee is required and what it covers. A guarantee can transfer risk back to the business even where the facility is described as non-recourse. The business can review the definition of a personal guarantee and any indemnity. The contract can also set out the funder's rights on a customer dispute, a reduction in credit limits or a decline in the debtor book. The business can check the claims process, the time limits and the documents required. The contract can define the notice period for changes to the facility and the process for resolving disagreements. The business can request a full schedule of fees and a worked example. It can also ask for the standard terms and any credit insurance policy summary. Those documents can show how the recourse, non-recourse and late payment provisions interact. A neutral checklist can help the business compare offers on the same basis.

Frequently asked questions

Is non-recourse factoring safer?

It moves insolvency risk on approved debts to the funder, but disputes and debts above credit limits usually stay with the business.

Why is non-recourse more expensive?

The fee includes the cost of credit protection, often backed by credit insurance.

What is a recourse period?

The time after an invoice's due date after which an unpaid debt must be bought back or replaced.

Does non-recourse cover customer disputes?

Generally no; cover usually applies to insolvency or defined protracted default only.

Can statutory late payment interest be claimed on factored invoices?

The Late Payment Act allows interest at 8% above Bank Rate on business debts; who can claim depends on the factoring agreement.