The Non-Recourse Bill Funding Mistake: Breaking the Myth

In life, it is important to distinguish between marketing and reality. When it comes to invoice financing, a marketing myth that has persisted is that non-recourse invoice financing transfers the risk of payment from the seller to the lender.

Unfortunately, non-recourse factoring is one of the most misunderstood topics in business loans. As a result, companies that undertake some form of invoice financing, receivable financing, or factoring tend to have bad expectations about this product, potentially causing unnecessary costs and not really understanding the credit relationship. risk.

Before we talk about non-recourse, let’s define recourse factoring. In recourse factoring, the wording of the contract may state that in the event that a purchased account is not paid and collected within 120 days of invoice for any reason, the factor will have the right to re-invoice that account. account to the seller.

Essentially, recourse funding refers to the case where the funder buys the invoice and the account debtor does not pay, or pays less than the full amount due to dilution (see Anticipating Dilution is Key to Solutions financing of invoices), the funder can then cover the deficit. They usually do this with the second installment. Note that in most factoring transactions, the invoice is purchased in two installments of an advanced amount (70-90% of the invoice value), and the final payment costs less when the account debtor pays.

Most (but not all) factoring companies define non-recourse factoring as follows:

Non-recourse factoring is a type of factoring establishment in which the factoring company assumes the risk of non-payment if the customer does not pay the invoice due to a insolvency during the factoring period.

Non-recourse factoring only offers payment protection for early part of the transaction. If the invoice is default, you not having to return the advance to the factoring company.

But non-recourse factoring has been “sold” as a total transfer of risk. Let’s look at an example. An invoice is issued on July 15, purchased without recourse on July 20 and payable by the account debtor on August 25. If the account debtor becomes insolvent during this period, the client still receives the prepayment by the financing institution. But the risk of debtor insolvency of the account during this period is highly unlikely in such a short period of time. It is easy to predict bankruptcy in the next 45-90 days, because of that the risk is low.

What non-use doesn’t cover is dilution, and that’s why non-use is a marketing effect. The risk for invoice financing, factoring or asset-based lender is from July 20 to August 25. After that, the lender has recourse, as non-payment can occur for many reasons other than insolvency.

Companies typically pay more for non-recourse financing as a supplier because the factor is take on more risk. The reality, as stated above, is that the risk is very low. There are new forms of factoring, called digital invoice financing or factoring 2.0, where an invoice or a portfolio of invoices is purchased from the seller’s accounting system, so that it is issued and ‘verified’ but not approved by his client (or buyer). The advantages of digital invoice financing are many over traditional invoice financing, such as no application fees or additional charges, no long-term commitments and, of course, no confusion. between recourse and non-recourse.

Keep in mind that Internet definitions of non-recourse factoring tend to give the impression that the business is not responsible for uncollected invoices from the account debtor and that the factor absorbs all payment risk. . The non-recourse generally only applies during the period until the payment due date of the account debtor.

As usual, the devil is ALWAYS in the detail!

David Gustin leads a research and advisory practice aimed at helping financial institutions, vendors, and businesses understand the intersection of trade credit, payments, and the financial supply chain. This post was writes while David was working on a special project with The Interface Financial Group.

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