If you plan on selling invoices it is important to know whether the funding proposal is for “recourse” or “non-recourse” factoring. Here is an overview of both methods.
A Look at Non-Recourse Factoring
Just like it sounds, if Capitol National Factors Company, LLC purchases accounts from you without recourse, in cases where we have granted you prior written credit approval on the subject invoices and agreed to buy accounts on this basis, we will have no recourse to you if we cannot timely collect the purchased accounts when due at maturity, solely because of the financial inability to pay of the account debtors (your customers) obligated thereon. You as seller retain all other risks. Accordingly, for example, if your customer can pay but chooses not to, or if the subject account cannot be timely collected because the account debtor disputes the quality or quantity of the goods and services your business delivered, or if the account was ineligible and sold to us in violation of your representations and warranties in the factoring agreement, we can still chargeback the account to you. A chargeback reverses our purchase and creates indebtedness from you to us, as more fully set forth in the factoring agreement.
To protect our investment and in view of our assumed credit risk, we will check the credit strength of your account debtors and we will also verify invoices with your customers, often before we buy. We typically handle all aspects of payment, collection and management of accounts we purchase, whether without recourse or even with full recourse. You cannot compromise, settle, assign or discount the accounts after they have been sold to us, nor can you lien them.
Because of, among other things, the benefits of transferring credit risk to the factor, “non-recourse” factoring makes up over 2/3rds of factoring volume in America.
As noted above, nonrecourse factoring does not eliminate your risks with respect to the accounts sold to us on this basis entirely. For example, if you deliver a product or service and your customer disputes the quality or quantify of such goods and services and does not pay for that reason, you will still be responsible for making good on the invoice upon its chargeback to you. Chargebacks are satisfied either by our set-off against the reserve we hold under your factoring agreement, by your delivery of substitute accounts acceptable to us (without payment by us to you), or by your paying the chargeback to us in cash.
Because of our assumed credit risk non-recourse factoring facilities may bear higher factoring fees.
Now A Look At Recourse Factoring
When you sell accounts to us on a full recourse basis, you essentially are guaranteeing to us that the purchased invoices will be timely collected by us in full. Unlike a loan, however, you do not have the right to repurchase any accounts sold to us, even on a full recourse basis, by tendering a cash payment to us equal to our unrecovered advances and any outstanding fees and costs owing. We, however, have the right to chargeback to you any accounts purchased with full recourse if they do not timely collect for any reason whatsoever, even if the reason is, for example, that post-purchase your customer (the account debtor) filed for bankruptcy or suffered some other event of credit risk.
Chargebacks to you of accounts purchased on a full recourse basis are generally satisfied in the same manner as in the nonrecourse factoring facilities discussed above, by either our lowering future funding to you, by set-off your indebtedness to us arising from the chargeback against the reserve we hold, by your replacing the “bad” invoice with another “good” one, acceptable to us, or by your paying the chargeback to us in cash. Typically, when we purchase accounts with full recourse your factoring agreement will provide that a purchased account which we do not collect within 90 days, for any reason, can be charged back to you.
Because we do not bear credit risk on accounts factored with full recourse, we may be able to offer you more attractive pricing (lower factoring fees) or higher advance rates, depending on the particular circumstances. We will examine the credit risk of both you and your account debtors when we buy accounts with full recourse and, because we have purchased the subject accounts, you may no longer settle, discount or lien them. As in nonrecourse factoring, we typically handle all aspects of the management, ledgering, and collection of the purchased accounts. We are more likely to offer non-notification factoring when we buy accounts with full recourse. You may not compromise, settle, assign or lien accounts sold to us on a full recourse basis.
Your final choice will be for the method that best fits your situation.