1. Risk Responsibility
- Recourse Factoring: The business is responsible for unpaid invoices. If a customer fails to pay, the business must buy back the invoice or replace it with another of equal or greater value.
- Non-Recourse Factoring: The factoring company assumes the risk of non-payment. If a customer defaults, the factoring company absorbs the loss, though there may be exceptions based on the agreement terms.
2. Fees and Costs
- Recourse Factoring: Typically offers lower fees because the business bears the risk of non-payment.
- Non-Recourse Factoring: Involves higher fees to compensate for the increased risk taken by the factoring company.
3. Advance Rates
- Recourse Factoring: Often provides higher advance rates since the business assumes the risk.
- Non-Recourse Factoring: May offer lower advance rates due to the higher risk absorbed by the factoring company.
4. Qualification Requirements
- Recourse Factoring: Generally easier to qualify for, as it requires less stringent credit checks on customers.
- Non-Recourse Factoring: More challenging to qualify for, as it typically requires customers with strong credit histories.
5. Application Process
- Recourse Factoring: The application process is often quicker and less complex.
- Non-Recourse Factoring: May involve a more thorough application process due to the higher risk involved.
6. Risk Mitigation
- Recourse Factoring: Exposes the business to the risk of bad debts, requiring them to manage collections.
- Non-Recourse Factoring: Provides protection against bad debts, allowing businesses to focus on core operations without collection efforts.
Recourse factoring is suitable for businesses that can manage the risk of non-payment and seek lower costs, while non-recourse factoring is better for those who want to mitigate risk but are willing to pay higher fees.
