Both invoice discounting and factoring involves financing a business, on a short-term basis, via selling invoices to a third party. Since the borrower’s invoices are already issued, the provider already has a reasonably good chance of recouping their debt but, regardless, assumes a level of risk. Consequently, factors usually add in a clause to the contract which stipulates ‘with recourse’ that means, should the invoice not be paid, the responsibility to settle the debt remains with the borrower.
The Legal Definition of ‘With Recourse’
‘Legal recourse’ means an action which may be taken by an individual or company to remedy a legal difficulty. Factors use this clause to protect themselves in the event of unpaid debt. While the vast majority of factoring cases use ‘recourse’, there are some situations, such as when dealing with large corporations, when the contract doesn’t require it.
What is the Risk for Non-Recourse Factors?
The biggest risk for factors that lend money without stipulating that the lender should retain responsibility is that of fraud. For most factors, fraud represents their single business risk so they take considerable time to research a company’s clients before lending money. Because of this risk, non-recourse factoring comes at a higher cost to the borrower. Some borrowers remain happy to assume this cost, however, because the costs of non-recourse factoring are usually lower than credit insurance, a notoriously expensive business. Borrowing money from a non-recourse factor is, therefore, akin to complete peace of mind for the borrower because, should the invoices not be paid, they cannot be held responsible.