Invoice factoring has become an enormously popular method of funding in the last 10 years and remains one of the fastest growing industries in the financial sector. Recourse and non-recourse factoring, although similar in most ways, host some extremely important differences.
The ability to access future funds by selling the factor your invoices is the same for both processes but the collection of debts and liability is fundamentally distinct and makes up the main differences between the two options.
Recourse Factoring Features
Recourse factoring means you are responsible for the collection of the debt and, should the debt remain unpaid, you are liable for non-payment. The time frame at which the invoice should be paid in full will depend on the contract you signed with your factor.
A factor will run full credit ratings on your clients to ascertain the risk involved, as well as provide you with the results, which can be beneficial to the running of your business and also provide a degree of security.
Recourse factoring makes up the vast majority of invoice funding in the UK, estimated at over 80% of all processes.
Non-recourse factoring contracts differ in that the factor takes on the liability for the debt; it is therefore more difficult to access and often more costly. These terms and conditions can differ, however, for example, they may only take on liability if the non-paying client has become insolvent.
Who Does Factoring Benefit?
Almost all businesses can benefit from invoice factoring but most are not able to access the non-recourse method due to the liability of the debt the factor takes on. For this reason non-recourse is a more suitable option for well-established businesses with a reliable client base. This is typically regardless of the size and turnover of your venture but it should be noted that there are minimum annual turnover requirements that have to be met.
Recourse factoring is more affordable and easier to access, although this does not mean that there are not set requirements that have to be met here also. Annual turnover minimums will vary from provider to provider but for startups and those with poor credit ratings, this can be problematic. There are factors that specialise in dealing with such enterprises, however, although these tend to be more costly.
Pros and Cons
On the face of it, it may appear that non-recourse factoring is the better choice of the two, but this is not always the case. Each provider will implement their own terms and conditions and each business seeking to access funding will have specific requirements that will complicate the choice further.
Recourse Pros and Cons
It is certainly true to say that recourse factoring is more affordable, so much so that, unless you are particularly concerned with collection of debt, it is advisable to use this type of invoice funding. What’s more, the factor can provide the same level of support in collection of your debt, whichever method you choose to access.
If you do use recourse factoring and one of your clients defaults on a debt, this can be enormously problematic. Although it is financially beneficial for the provider for the debt to be paid, and they will assist you in every way they can, they will not hesitate in demanding you cover your liabilities.
Non-Recourse Factoring Pros and Cons
As described previously, the main advantage in using a non-recourse factor is the liability of the debt, but the advantages do not end there. Employing the services of a professional factor, with its debt collection expertise, is thought to increase the likelihood of payments being met by over 75%. Although this does relate to both methods, it is particularly keenly felt with non-recourse factoring.
Unfortunately, non-recourse factoring can be expensive and not all contracts mean you are without liability. There are many modified non-recourse contracts that, if not understood properly, can lead to problems in the future.
Another problem is that non-recourse factors tend to require more control over the way you deal with your client, although this will vary. This can cause problems and should considered before committing to the contract.
Cost and accessibility is another consideration, but it should be noted that many factors offer contracts that are nominally more expensive than recourse factoring and this will depend on the risk associated with your clients.
As previously alluded to, terms and conditions can vary wildly from provider to provider, and what might be beneficial for one company might not suit another. With this in mind these are some of the most reputable providers of both recourse and non-recourse factoring in the UK:
- Ashley Business Finance
AldermoreFounded in 2009 with a view to help finance SME (Small to Medium Sized Enterprises) Aldermore have gone from strength to strength in recent years. Scalable, flexible and highly supportive, they are extremely well-suited to those who require advice and support in funding and debt collection with a professional face.
Providing funding to businesses of all sizes, from startups to established ventures, and across a wide range of sectors, Calverton are one of the most accessible factors in the UK. Non–recourse factoring is accessible to many who would otherwise be deemed unsuitable and each part of the process can be customised to suit your needs.
Ashley Business Finance
One of the most experienced providers in the UK, Ashley Business Finance provide a huge range of factoring options, from single invoice to non-recourse, at competitive rates for SME across all sectors. The service is designed to grow with your business and there are multiple options that can be tailored to suit your needs, even after the contract has been signed.