Recourse and Non-Recourse invoice Factoring

When you look at invoice factoring, there are really two main types: recourse and non-recourse.
With recourse factoring, you’re still ultimately responsible if your customer doesn’t pay. For example, if you factor a $50,000 invoice and the customer goes out of business, you’ll need to buy that invoice back or replace it with another one of equal value. Think of it as: the factor advances you the cash, but the risk of non-payment stays with you.

With non-recourse factoring, the risk shifts more to the factor. As long as the customer qualifies for credit insurance, you’re protected if they can’t pay due to insolvency. For instance, if that same $50,000 customer went bankrupt, the factor would take the hit—not you. The catch is that “non-recourse” doesn’t cover every situation; if there’s a dispute about the product or service (say, the customer claims the order was wrong), you’re still responsible.

So, in simple terms:

Recourse = safer for the factor, more responsibility on you. Less expensive for you.
Non-recourse = safer for you, as long as your customer is insurable. More expensive and more restrictive on eligibility which may affect cash flow.

Making a decision if recourse vs non-recourse is better, should boil down to customer concentration.

Example: Customer Concentration & Credit Exposure example for recourse vs non-recourse factoring:

Scenario	Sales Mix	Exposure Risk	Impact of a $75,000 Default
High Concentration	$1,000,000 annual sales One customer = $300,000 (30%)	Heavy dependence on one client. If they fail, a large portion of revenue is at risk.	Losing $75,000 from this client = 25% of their business with you and 7.5% of your total sales gone immediately.
Moderate Concentration	$1,000,000 annual sales Five customers = $200,000 each (20%)	Balanced but still vulnerable. Each client carries significant weight.	If one fails, you lose 7.5% of your total revenue right away.
Well-Diversified	$1,000,000 annual sales 20 customers = $50,000 each (5%)	Risk is spread across many customers. A single default is less damaging.	Losing $75,000 (about 1.5 customers’ worth) = only 7.5% of revenue, easier to absorb.

The recourse vs non-recourse factoring takeaway: The more spread out your customer base, the less devastating one failure can be. Factoring can help manage that risk, but understanding your concentration is the first step to determining between recourse or non-recourse factoring.

Make sure you read the fine print and really understand what non-recourse factoring truly offers.

Not every customer can be covered by credit insurance—it depends on their financial strength.
Even if they are insurable, the coverage might not fully match what they owe you.
A factor may only be willing to buy as much as the insurance company is willing to cover.
Credit insurance isn’t permanent—coverage can be reduced or withdrawn at any time.
Non-recourse factoring cost is 15 to 30 basis points higher for coverage.
And keep in mind: insurance won’t protect you if the customer simply refuses to pay or disputes the invoice—in that case, the invoice could still fall back on you under recourse.

Some factors give you the option of a hybrid recourse and non-recourse agreements. This setup lets the factor decide when to step in and cover certain customers, giving you more flexibility in how you manage risk.

You can also get your own trade credit protection through providers like Coface, Allianz, or Atradius. They offer coverage that works much like the protection you’d get from a factoring company.

Recourse vs. Non-Recourse Factoring Comparison

Feature	Recourse Factoring	Non-Recourse Factoring
Who takes the risk?	You (the seller) are responsible if the customer doesn’t pay.	The factor takes on the risk if the customer becomes insolvent (bankruptcy, liquidation) provided the customer is insurable.
Typical Cost	Lower fees, since the factor has less risk.	Higher fees, because the factor is assuming more risk.
When you repay	If the invoice isn’t paid for any reason, you must repay or replace it.	You’re protected only if the customer is credit-insured and fails due to bankruptcy.
Disputed Invoices	You must resolve disputes and still repay if necessary.	Still your responsibility—disputes are not covered under non-recourse.
Best For	Businesses confident in their customers’ ability to pay.	Businesses that want added protection from customer bankruptcies, insolvency or high concentration.
Example Scenario	Customer refuses to pay or goes out of business → You repay the factor.	Customer goes bankrupt but was insured → Factor absorbs the loss, you keep the advance.