Recourse vs non-recourse factoring, in plain English

The short answer

Recourse: if a customer doesn't pay within a set window, often around 90 days, you buy the invoice back or swap in a new one. Non-recourse: the funder absorbs the loss in certain cases, usually only when your customer goes out of business or into bankruptcy. Non-recourse typically costs more.

What non-recourse usually does not cover

This is where most owners get surprised. Non-recourse protects you from a customer's credit failure, not from every unpaid invoice. It usually does not cover:

• A customer who disputes the work or the amount
• Short payments, offsets or deductions
• A customer who is just slow, not insolvent
• Missing paperwork or invoices that weren't valid

Some funders also only cover customers they approved one by one, up to a set limit.

An example

You factor a $50,000 invoice: 90% upfront ($45,000), 2% for each 30 days. Your customer stops paying.

When non-recourse is worth it

• One or two customers make up most of your billing, and losing one would hurt badly.
• Your customers' finances are shaky or hard to judge.
• The extra cost is small compared with what a single bad customer would cost you.

If your customers are large, steady payers, recourse is usually cheaper and the risk is lower than it sounds. Either way, read the exact definition in the contract: "non-recourse" means whatever the agreement says it means.

General information, not legal, tax or accounting advice. Every funder and contract is different. Examples use made-up numbers.