When small and mid-market businesses are looking for solutions to capital challenges, searching online can be overwhelming. Search terms, industry jargon and definitions can vary by financing company, creating confusion and prolonging the process.
At Gibraltar Business Capital we value transparency – and simplicity. We cut to the chase and provide direct answers to clients’ most common questions. Case in point? Recourse vs nonrecourse factoring.
The differences between the two types of factoring can be found in the word “guarantee.” The seller of receivables in a full recourse factoring agreement is guaranteeing full payment of the financed receivables and assumes liability for any unpaid invoices. In a nonrecourse contract, the seller does not guarantee that the accounts receivable are collectable. Therefore, the factoring company takes any losses on nonperforming receivables rather than charging them back to its client.
Although it may sound appealing or less restrictive to a company with a financing need, a nonrecourse contract will cost more money and is typically very narrow in its scope. For example, most nonrecourse contracts protect clients only if their customer has become insolvent. It won’t cover past due payments, breach of contract, or invoice disputes, for example.
Also, a factoring company still has the right to exclude or include certain accounts receivable from financing based on their credit evaluation, regardless of the contract type. So, a client may not gain additional liquidity in the end while still paying more for the same treatment of individual invoices or accounts.
When asked if nonrecourse factoring is ever a good idea, Gibraltar’s President Scott Winicour explains, “Nonrecourse might be a good fit for larger businesses with a broader customer base. But for small and mid-market businesses, it’s typically not recommended. You’re paying a hefty premium for an insurance policy that gives you little protection. We stand by our customers’ invoices and help them make sure a bad debt doesn’t happen in the first place,” Winicour says. “We partner with clients because we trust them to stand behind their invoices and products because it’s in their best interest to do business with customers in good financial standing.” Winicour also underscores a key differentiator for Gibraltar as he explains, “We try not to confuse clients with pricier “value adds” that are not really what they seem.”
If you have additional questions related to factoring, connect with a member of our team to learn more. Or click here to access a 13-part video series that addresses the top questions related to factoring including how factoring works, how Gibraltar evaluates risk, and Gibraltar’s unique approach to factoring.