Non-Recourse Factoring Secrets

When fully explained and understood, non-recourse factoring can be an extraordinarily beneficial tool— the key words being “fully explained and understood.” Non-recourse factoring costs more than recourse factoring, which leads clients to believe that more expense will equate to better protection. The problem is that many clients simply don’t understand exactly what they’re getting.

Look at a non-recourse factoring agreement like an insurance policy. You pay a premium for added coverage, but there are still exclusions. For example, you purchase a home owners insurance policy believing you are covered in the event of any natural disasters, only to discover that flood damage is not covered. Your agent may or may not have warned you about this before selling you the policy, but there are often too many details covered in the course of purchasing a policy to remember them all. A non-recourse factoring arrangement is similar. Because it is an insurance product, so to speak, there are many exclusions from coverage. These exclusions may be discussed by the factoring company’s sales personnel or they may not. Often we find that, either way, clients seldom receive what they thought they paid for.

The most commonly misunderstood concept behind non-recourse factoring is that, once the client sells the invoice to the factor, the client doesn’t have to worry about whether or not the factoring company receives payment. In reality, nothing could be further from the truth. In most non-recourse factoring agreements we’ve read, the only protection the client may receive is in the event of a narrowly defined “credit problem” on the part of the client’s customer, typically only bankruptcy or filing for reorganization. Those terms are fine— as long as the client understands.

The reality in business is that there are numerous reasons why an invoice may not be paid. Despite the tough economic times, it is still rare that the reason for non-payment is a bankruptcy filing. In fact, in the majority of cases, invoices are not paid for other reasons, all of which would leave the client having to repay the factor. Here are 10 common examples of instances in which the client will be liable to repay the factor the amount advanced against the invoice not paid by the client’s customer:

  1. If any type of a dispute is raised, legitimate or not.
  2. If the customer experiences cash flow problems but does not file for bankruptcy law protection.
  3. If the customer closes its doors for economic reasons but does not file for bankruptcy law protection.
  4. If the customer claims goods were delivered late.
  5. If the customer claims a portion of the delivered goods were damaged.
  6. If the customer claims that the client owes the customer money.
  7. If the customer wants to return any merchandise for credit.
  8. If the customer cannot afford to pay.
  9. If the client was in breach of any representations or warranties at the time the invoice(s) were sold to the factor.
  10. If the client was past due on its federal taxes at the time the invoice(s) were sold to the factor.

The bottom line is, if you are willing to pay more for non-recourse factoring than for recourse factoring, make sure you understand exactly what you are getting for that premium. Writing, maintaining and following a sound credit policy is likely the more effective way to deal with the threat of bad debts.

Author: Tony Furman
Copyright 2009
Interstate Capital Corp.

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