In a non-recourse factoring agreement, the factor assumes the risk of non-payment by the customer, meaning the business is protected from losses related to uncollectible accounts. This type of factoring is beneficial for companies that may face cash flow challenges or have customers with uncertain creditworthiness, as it allows them to access immediate cash while transferring the risk of default to the factor. The factor charges a fee for this service, typically based on the creditworthiness of the accounts being factored and the volume of receivables.
Non-Recourse Factoring Example
For example, a small manufacturing company has $100,000 in accounts receivable from various clients. It enters into a non-recourse factoring agreement with a factoring company, which purchases the receivables for $95,000. If one of the clients fails to pay their invoice, the manufacturing company does not have to repay the factoring company, thus limiting its financial risk.