Non-recourse factoring explained

Non-recourse factoring explained

What is factoring?

In the UK factoring involves a business selling its invoices to a factoring company. In return the factoring company will pay up to 80-90% of the invoice against the money owed to your business. In the UK factoring companies provide a finance, debt collection and ledger management service.

Factoring is commonly used by businesses to improve cashflow but can also be used to reduce administration overheads. Businesses that supply this service are called factors or debt factoring companies.

What does non-recourse mean?

Non-recourse where an obligation is entered into or a transaction is conducted, under the stipulation that it is without recourse to the borrower, endorser, or seller. That is, he or she is not personally liable to the lender, holder, or buyer for any default, loss, or defect. Presence or absence of recourse determines whether a sale is actually a sale for accounting purposes or is a transfer of ownership See also recourse, sans recourse and with recourse.

What is non-recourse factoring?

In non-recourse factoring, the factoring company takes on the risk for any bad debts. The factoring company accepts the risks around the debtor’s failure to pay, but it does not insure against debts that are unpaid because of genuine disputes.

  • In the UK non-recourse factoring is more expensive than recourse factoring.
  • Under a non-recourse factoring facility the business using the factoring facility will not have to refund the advance to the factor
  • With non-recourse factoring the business using the factoring facility must pay interest to the factor for the period specified by the factoring agreement.
  • In a non-recourse factoring facility the factoring company takes over all your rights to pursue the customer for payment. This includes the right to take legal action.
  • Non-recourse factoring has higher fees than recourse factoring because the factoring company is incurring all the risk.
  • Its harder to qualify for non-recourse factoring services
  • The audit process is much more detailed with non-recourse factoring with the factoring company checking all financial systems, assessing all clients and going back to check what past payment performance has been like.

The UK will be able to locate and recommend a good financing company for your business needs. Call 0800 597 4757 for more advice today or to get a factoring quote.

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