The Benefits Of Non Recourse Factoring (Bad Debt Protection)
Some but not all factoring companies (factors) are able to offer non recourse facility options, this can give your business protection against bad debts, providing you stick within the credit limits that they grant for particular debtors. Non recourse may be offered in conjunction with either a debt factoring (factor collects the sales ledger) or an invoice discounting (the client collects the sales ledger) facility.
The normal method of operation is that the client will apply to the factor for a non recourse credit limit in respect of any new customer that the client intends to sell to. The factoring company will research the customer and decide upon a non-recourse credit limit. The credit limit normally represents the level of invoicing which the factor will cover - giving the client protection, providing they don't exceed that limit of invoicing to that debtor.
Non Recourse Factoring
A covered invoice is normally one that if not paid for reasons of the customers insolvency (or in some cases protracted default), the factor will pay the balance of the invoice to their client. The client may also be subject to some kind of first loss clause which may reduce the value of the payout, and some, but not all, factors offer 100% bad debt protection.
The benefit that non recourse provides is the protection against bad debts that it affords the client. Providing the client trades within the value of the credit limits provided by the factor, they know they are protected against failure of their customer (check the terms of the agreement though for the exact circumstances). There is however a cost consideration. Non recourse will normally be more expensive than recourse but our advisers are aware of the various factors that are offering low cost non recourse options at any time.
One further consideration is the quality and spread of the customers that the client company deals with. If they are all blue chip companies or government departments the client may decide that they will receive little benefit from non recourse. Also, if your sales ledger is extremely well spread, such that you only have very small amounts owed by any one debtor, you may argue that non recourse bad debt protection is not necessary.
On balance though, if the failure of a major debtor could seriously affect your business you would be well advised to consider the non recourse option which could provide peace of mind.
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