In recourse factoring you must buy back invoices your customers fail to pay — lower cost but you bear all credit risk. Non-recourse factoring shifts that risk to the factor if the customer is insolvent, but it covers bankruptcy only (not disputes or slow-pay) and costs meaningfully more per 30-day period.
Every factoring arrangement transfers an invoice from your business to the factor. The central question is: who bears the loss if the customer doesn't pay? Recourse factoring answers: you do. Non-recourse factoring answers: the factor does (subject to contract terms). The recourse provision directly affects pricing, approval criteria, and how the arrangement is classified under accounting standards.
Recourse factoring is the more common structure — particularly for small and mid-size businesses. The factor advances 70–90% of invoice face value; if your customer becomes delinquent or insolvent, you are obligated to repurchase the invoice at the original advance amount (plus any fees accrued). Most recourse agreements specify a 'recourse period' — typically 60–90 days past invoice due date — after which the factor triggers the repurchase obligation. Because the factor retains no credit risk, recourse factoring rates are lower (typically 1–3% per 30 days vs. 2–4% for non-recourse). The tradeoff: you need a creditworthy customer portfolio or cash reserves for bad debt.
Non-recourse factoring shifts credit risk to the factor — if your customer files for bankruptcy or is legally unable to pay (the specific qualifying events are defined in your contract), the factor cannot recover from you. The higher cost reflects the factor's pricing of that credit exposure. Critically, non-recourse does not mean unlimited protection: most non-recourse agreements only cover insolvency or bankruptcy, not slow-pay, disputes, or customer refusal to pay. If your customer has the ability to pay but is disputing the invoice, that typically remains a recourse obligation even in a non-recourse structure. Read the contract definitions of 'eligible non-payment' carefully.
Under FASB ASC 860 — Transfers and Servicing of Financial Assets, a recourse factoring arrangement where the seller must repurchase defaulted receivables may fail the true-sale test and be reclassified as a secured borrowing rather than a sale. The reclassification hinges on whether the recourse obligation gives the transferor 'effective control' over the transferred asset. Non-recourse factoring (where the seller has no obligation to repurchase) more cleanly satisfies ASC 860's derecognition criteria. Practical implication: businesses using recourse factoring for balance-sheet management should confirm ASC 860 treatment with their auditors.
Under IRS Publication 535 — Business Expenses, bad debts from business receivables are deductible under either the specific charge-off method or the reserve method. For businesses using recourse factoring: if you repurchase an invoice and the customer subsequently fails to pay, you may have a bad-debt deduction at that point. For non-recourse factoring: the factoring fee (the discount at which you sold the invoice) effectively prices in the credit risk — you deduct the factoring discount as a business expense when the sale occurs, and you have no further bad-debt exposure on that receivable.
Most non-recourse agreements cover insolvency/bankruptcy only — not disputes, slow-pay, or customer refusal to pay. If your customer has the financial ability to pay but refuses due to a billing dispute, the factor will typically trigger recourse even under a non-recourse agreement. Always read the 'eligible non-payment' definition before signing.