What is recourse factoring and what happens if the customer doesn't pay?

In recourse factoring, the factoring company advances a percentage of the invoice and collects from the customer. If the customer pays, the factor remits the reserve (the held-back percentage) minus the factoring fee. If the customer does not pay by a defined date — often 90 days from the invoice due date — the business must repurchase the invoice at the original advance amount, effectively returning the cash they received. The factor's risk is limited to the operating period; the business carries the credit risk throughout.

Recourse factoring is cheaper than non-recourse factoring because the factor takes on less risk. Factoring fees for recourse arrangements are typically 1% to 3% of invoice value per 30-day period, whereas non-recourse arrangements charge more to compensate for absorbing credit losses. For businesses with a reliable customer base that rarely fails to pay, recourse factoring is usually the better economic choice — the lower fees matter more than protection against a rare default.

The risk of recourse factoring is concentrated in the buyback obligation. If a business sells invoices from a single large customer who then becomes unable to pay, the business must return the advance on all those invoices at once — a cash event that can be severe. Factoring agreements often include concentration limits for this reason, capping how much of the facility can be against any single customer. Read factoring agreements carefully for the buyback timeline, concentration limits, and the definition of default that triggers the recourse obligation.