Non recourse factoring is a financial service that allows businesses to sell their invoices to a factoring company without the obligation to repay if the customer defaults. This type of factoring tends to transfer the credit risk from the business to the factoring company. 

Find below five vital aspects you should know about non recourse factoring.

Risk mitigation

Non recourse factoring mitigates the risk of bad debt. If a customer fails to pay the invoice due to insolvency, the factoring company absorbs the loss. This protection helps businesses maintain financial stability and reduces the stress of potential unpaid invoices.

Improved cash flow

Similar to traditional factoring, non recourse factoring provides immediate cash flow. Businesses receive funds quickly after selling their invoices, which helps in covering operational expenses and investing in growth opportunities without waiting for customer payments.

Credit check and monitoring

Factoring companies perform credit checks on your customers before agreeing to purchase invoices. This ensures that you are dealing with creditworthy clients. Additionally, the factoring company monitors your customers’ credit status, providing ongoing risk assessment and management.

Higher fees

Non recourse factoring typically comes with higher fees compared to recourse factoring. The additional cost reflects the increased risk that the factoring company takes on by assuming the credit risk. It is important to weigh these costs against the benefits of risk mitigation.

Eligibility criteria

Not all invoices qualify for non recourse factoring. Factoring companies have strict criteria for the creditworthiness of customers and the nature of the invoices. Businesses must ensure their invoices meet these criteria to take advantage of non recourse factoring.

Final thoughts 

Non recourse factoring is a valuable financial tool for businesses seeking to mitigate credit risk and improve cash flow. By transferring the risk of non-payment to the factoring company, businesses can secure their finances and focus on growth. Understanding these aspects can help you make informed decisions about using non recourse factoring to support your business.