When your business needs fast working capital, invoice factoring can unlock the cash tied up in your accounts receivable. But once you start exploring factoring, you’ll quickly encounter two options:
- Recourse Factoring
- Non-Recourse Factoring
Understanding the difference between the two is critical. The structure you choose impacts your risk exposure, pricing, and long-term cash flow strategy.
In this guide, we’ll break down exactly how recourse and non-recourse factoring work, the pros and cons of each, and how to determine which solution is right for your business.
What Is Invoice Factoring?
Invoice factoring is a form of accounts receivable financing where you sell your unpaid invoices to a factoring company at a discount in exchange for immediate cash.
Instead of waiting 30, 60, or 90 days for customers to pay, you receive most of the invoice value upfront—often within 24 hours.
Factoring is widely used in industries such as:
- Trucking and freight
- Staffing and payroll-heavy businesses
- Construction
- Manufacturing
- Oil & gas
- Government contracting
- Janitorial and security services
- Healthcare
The key difference between recourse and non-recourse factoring lies in who ultimately absorbs the risk if your customer does not pay.
What Is Recourse Factoring?
Recourse factoring means your business remains financially responsible if your customer fails to pay the invoice.
If an invoice becomes uncollectible after a specified period (typically 60–90 days), you must either:
- Repurchase the invoice, or
- Replace it with another valid invoice
How It Works
- You submit invoices to the factoring company.
- The factor advances a large percentage (often 80–95%).
- The factor collects payment from your customer.
- When the customer pays, you receive the remaining balance minus the factoring fee.
- If the customer does not pay, you are obligated to buy back the invoice.
Advantages of Recourse Factoring
✔ Lower fees – Because you retain the credit risk, pricing is typically more affordable.
✔ Higher advance rates – Many factors offer stronger advances under recourse agreements.
✔ Flexible approval – Easier to qualify for most B2B businesses.
✔ Best for reliable customers – Ideal if your clients have strong payment histories.
Potential Downsides
- You carry the risk of customer non-payment.
- If a large invoice goes unpaid, it can impact cash flow.
What Is Non-Recourse Factoring?
Non-recourse factoring shifts certain credit risk from your company to the factoring company.
If your customer becomes insolvent or bankrupt and cannot pay, the factoring company absorbs the loss—provided it falls under the agreement’s covered conditions.
Important Clarification
Non-recourse does not mean the factor assumes all risks.
Most non-recourse agreements only cover:
- Customer bankruptcy
- Formal insolvency
They typically do not cover:
- Disputes over goods or services
- Slow payments
- Refusals to pay due to contract disagreements
Advantages of Non-Recourse Factoring
✔ Credit risk protection – Added security against customer bankruptcy.
✔ Stronger balance sheet presentation – May reduce contingent liabilities.
✔ Peace of mind – Especially valuable in uncertain economic conditions.
Potential Downsides
- Higher fees
- Slightly lower advance rates
- More stringent customer credit requirements
Side-by-Side Comparison
| Feature | Recourse Factoring | Non-Recourse Factoring |
|---|---|---|
| Who bears credit risk? | Your business | Factor (limited conditions) |
| Cost | Lower | Higher |
| Advance rates | Often higher | Slightly lower |
| Best for | Stable customers | Higher-risk industries or new clients |
| Bankruptcy protection | No | Yes (typically) |
Which Option Is Right for You?
The answer depends on your business model, customer base, and risk tolerance.
Recourse Factoring May Be Right If:
- You work with established, creditworthy clients.
- Your customers have consistent payment histories.
- You want the lowest possible factoring cost.
- You’re confident in your receivables quality.
This is the most common type of factoring across trucking, staffing, manufacturing, and service industries.
Non-Recourse Factoring May Be Right If:
- You serve new or higher-risk customers.
- Your industry has elevated bankruptcy risk.
- You want additional protection against insolvency.
- You prefer a more conservative financial structure.
Industry Considerations
Certain industries lean toward one structure over the other:
- Trucking & Freight Factoring – Often recourse due to predictable broker payments.
- Staffing & Payroll Funding – Frequently recourse to keep fees low.
- Construction & Government Contracting – Can benefit from selective non-recourse options.
- Manufacturing – Depends on customer concentration and credit strength.
The right structure should align with your industry’s payment patterns and your customers’ financial stability.
Cost Differences: What to Expect
While rates vary based on volume, industry, and customer credit quality:
- Recourse factoring typically costs less because you retain risk.
- Non-recourse factoring includes a premium to compensate for the additional credit protection.
The difference is often justified when factoring large invoices to customers in volatile markets.
Key Questions to Ask Before Choosing
Before signing a factoring agreement, ask:
- What specific risks are covered under non-recourse?
- What is the repurchase period under recourse?
- How are disputes handled?
- Are there minimum volume requirements?
- Is the agreement month-to-month or long-term?
Transparency matters. The structure should fit your operational needs—not create hidden liabilities.
How EZ Invoice Factoring Helps You Decide
At EZ Invoice Factoring, we help businesses evaluate both options based on:
- Customer credit profiles
- Industry risk
- Invoice volume
- Cash flow needs
- Growth goals
We don’t push one-size-fits-all solutions. Instead, we design flexible factoring programs that align with your business strategy.
Whether you need lower-cost recourse factoring or added protection through non-recourse options, our team makes the process:
- Fast
- Simple
- Transparent
- Easy to understand
Most approvals happen quickly, and funding can occur in as little as 24 hours after setup.
Final Thoughts
Recourse and non-recourse factoring both provide powerful tools to improve cash flow and stabilize operations. The key difference comes down to who absorbs the risk if your customer fails to pay.
If your customers are strong and reliable, recourse factoring often provides the most cost-effective solution.
If you want added protection against insolvency risk, non-recourse factoring may provide valuable peace of mind.
The right choice depends on your business, your customers, and your growth plans.
Ready to Improve Your Cash Flow?
If you’re evaluating factoring options and want expert guidance, EZ Invoice Factoring is here to help.
Contact us today for a free consultation and discover which factoring structure fits your business best.
