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Top 8 Things to Understand Before Signing A Non-Recourse Factoring Agreement

Last Modified : May 09, 2024

Fact-checked by: Bruce Sayer

Current economic conditions can best be described as “uncertain.” Analysts have recently downgraded growth projections for many industries, the talk of a potential recession still lingers, and as of Aug 31, the number of business bankruptcies in 2023 has already surpassed the full-year totals for 2021 and 2022.

In this business environment, invoice factoring is continuing to escalate as a preferred business financing option for companies seeking a flexible funding solution to support sustainability. For companies already utilizing invoice factoring and those just now becoming familiar with this powerful financing option, non-recourse factoring is starting to take center stage as a risk-mitigating strategy to minimize the dangers of bad debt.

In a non-recourse factoring agreement, the factoring company assumes the credit risk for the invoices it purchases. This means that if the customer doesn’t pay the invoice due to bankruptcy, the responsibility for the loss falls on the factor, not the business that sold the invoices. But as with any financial arrangement, the devil is in the details. While non-recourse factoring can offer numerous advantages, reading the fine print and knowing what to expect is essential. Here are the top 8 things to look for and fully understand before signing a non-recourse factoring agreement.

What to Look for and Understand in a Non-Recourse Agreement

1. Definition of ‘Non-Recourse’

The term “non-recourse” can vary from one factoring company to another. Ensure you understand under what conditions you are protected from customer defaults and non-payments. This clarity is vital for assessing the actual value of your non-recourse factoring agreement. When shopping for a factoring company, knowing the terms and conditions of the coverage they offer and ensuring it aligns with the funding needs and bad debt protection your company requires is essential.

2. Fee Structure

The fee structure for non-recourse factoring can vary by provider and is generally higher than that of recourse factoring due to the added risk that the factoring company takes on. Here are some of the main components of the fee structure that you may encounter:

Factoring Fee: This is the primary fee, generally charged as a percentage of the invoice amount. This fee compensates the factoring company for expediting payment and taking on the risk of non-payment by your customer. In non-recourse factoring, this fee is usually higher than in recourse factoring. Depending on various factors like the creditworthiness of your clients, the volume of invoices, and your industry, it may range from 0.5% to 1.0% higher than recourse factoring.

Advance Rate: This rate is the percentage of the invoice amount you receive upfront from the factoring company within hours of submitting the receivable for financing. The remaining balance is paid once the customer settles the invoice. Typical advance rates might range from 70% to 90%, minus the factoring fee and any additional service fees. The best factoring companies specializing in freight factoring can offer up to 100% advance rates to trucking companies with creditworthy customers.

Reserve Amount: When a factoring company’s advance rate is less than 100%, they typically hold the unpaid portion of the invoice amount as a reserve until the business’s customer pays the invoice. Once the factoring company receives full payment of the invoice the reserve amount is immediately released and transferred to your business account.

Additional Service Fees: Some factoring companies charge extra for additional services like money transfers, credit checks on your clients, and administrative tasks. Make sure you understand what these are and how much they cost.

Volume Discounts: Some factoring companies offer tiered pricing based on the volume of invoices you’re factoring. Higher volumes may result in lower fees.

Transaction Fees: There may also be per-transaction fees every time you submit a new batch of invoices for factoring. These are generally nominal but can add up.

Early Termination Fee: If your agreement has a fixed term and you wish to terminate early, there may be an early termination fee. Always check the specifics of this clause in your contract.

Miscellaneous Fees: Always ask about any other potential fees, like setup fees, renewal fees, or fees for breaking the minimum invoice volume requirements, so you aren’t caught off guard.

3. Contract Length and Termination

Check for the minimum contract length and understand the termination process, including any penalties for early termination. Make sure these terms align with your business needs.

4. Due Diligence Process

A factoring company undertakes a due diligence process to assess the risk of purchasing your invoices. Given that the factoring company assumes the risk of non-payment from your customers, this evaluation is often more comprehensive than what you’d find with recourse factoring.

The first step usually involves an assessment of your business’s financial health to help the factoring company determine your reliability as a business partner. Next, the focus shifts to your customers. The factoring company will assess their creditworthiness by reviewing their payment histories, credit scores, and other financial data. Since the factoring company assumes the risk of non-payment, they want to be assured that your customers are financially stable and likely to pay their invoices on time.

Finally, the factoring company will typically perform compliance checks to ensure that your business and its operations adhere to relevant laws and regulations.

5. Customer Interaction

Your factoring company will likely interact directly with your customers when collecting payments. If a customer company becomes bankrupt, the collection team may negotiate payment plans, settlements, or work with legal professionals to minimize the factoring company’s losses. Ensure the collection team excels in servant leadership to reflect well on your business and protect your company’s brand reputation as they work to maximize the recovery of funds.

6. Industry Experience

Industry-specific experience and expertise can include specific collection strategies that facilitate a more successful collection process when dealing with bankrupt customers. A factoring company with fewer losses in an industry can offer better factoring rates to businesses in that industry.

7. Confidentiality Clause

A confidentiality clause in a non-recourse factoring agreement protects sensitive information related to both your business and the factoring company. Since factoring often involves disclosing business-critical information such as customer lists, financial statements, and other proprietary data, maintaining confidentiality is crucial.

The clause generally stipulates that neither party will disclose confidential information to third parties, both during and after the termination of the agreement. This is especially critical for preserving your business relationships and competitive advantage. If the factoring company interacts with your customers to collect invoice payments, the confidentiality clause might also specify how and what information they are permitted to share.

In some cases, there may be exceptions to the clause, such as when disclosure is required by law or in the event of a legal dispute between your business and the factoring company. These exceptions would typically be explicitly defined in the agreement.

8. Dispute Resolution

Dispute Resolution in a non-recourse factoring agreement refers to the procedures and mechanisms to handle disagreements or conflicts between the parties involved, namely your business and the factoring company. Since non-recourse factoring involves transferring rights to your invoices and assumes the risk of non-payment by your clients, disputes can arise regarding various issues, such as service fees, customer payments, or the interpretation of contract terms.

The Dispute Resolution clause usually outlines the steps to be taken if such disagreements occur. The initial step is commonly negotiation, where both parties attempt to resolve the issue through direct communication. If that fails, the agreement might prescribe mediation, where a neutral third party facilitates a resolution.

If both negotiation and mediation fail, the agreement may specify that the dispute goes to arbitration, another form of alternative dispute resolution. Unlike a public court, arbitration is usually quicker and less formal, although the decision is generally binding.

General considerations when choosing a factoring company

Whether entering a recourse or non-recourse factoring agreement, the factoring company you choose to work with becomes a financial partner for your business. Ensure the relationship is the best fit for your organization. The following are three more general considerations when choosing a factoring company:

Additional Services: Some factoring companies offer add-on services like credit checks or online account management. Ensure you’re not paying for services that are unnecessary for your business.

Reviews and Testimonials: Always check online reviews and ask for references before committing to a factoring company. Other businesses’ experiences can give you valuable insights as to what service level to expect from your lender.

Integrity and Trust: Ensure the factoring company complies with industry standards and is recognized as a reputable lender. Check for the lender’s industry associations and whether they are members in good standing.


Although non-recourse factoring can offer numerous advantages to businesses seeking additional protection from bad debt, it is critical to understand under what conditions you are protected, as each lender has different terms and conditions. In addition, understanding the fee structure is equally essential for determining whether it’s the right option for your business. Always ask for a detailed breakdown of fees and read the agreement carefully to grasp the full consequences of the contract. Consult with a financial advisor to ensure you fully understand the financial implications of entering into a non-recourse factoring contract.

Paying attention to these 8 details of a non-recourse factoring agreement will help you be better prepared to make an informed decision that aligns with your business’s financial needs and operational goals.

Key Takeaways

  • The number of business bankruptcies in 2023 has already surpassed the full-year totals for 2021 and 2022.
  • In a non-recourse factoring agreement, the factoring company assumes the loss if non-payment is due to bankruptcy.
  • Learn the top 8 things to look for and fully understand before signing a non-recourse factoring agreement.
  • The factoring company you choose to work with becomes a financial partner for your business. Ensure the relationship is the best fit for your organization.
  • Make an informed decision that aligns with your business’s financial needs and operational goals when choosing a factoring company.
ABOUT eCapital

Since 2006, eCapital has been on a mission to change the way small to medium sized businesses access the funding they need to reach their goals. We know that to survive and thrive, businesses need financial flexibility to quickly respond to challenges and take advantage of opportunities, all in real time. Companies today need innovation guided by experience to unlock the potential of their assets to give better, faster access to the capital they require.

We’ve answered the call and have built a team of over 600 experts in asset evaluation, batch processing, customer support and fintech solutions. Together, we have created a funding model that features rapid approvals and processing, 24/7 access to funds and the freedom to use the money wherever and whenever it’s needed. This is the future of business funding, and it’s available today, at eCapital.

Sean Campbell Headshot

Sean Campbell, Business Development Officer, has over 15 years of experience in providing alternative finance solutions to businesses, with a focus on supporting clients in the transportation industry.

Prior to joining eCapital, Sean held business development positions at Crestmark Bank, now Pathward, and Bibby Financial Services North America, which was acquired by eCapital in 2020. Fueled by a trusted network of industry partners and unmatched expertise, Sean has helped transportation companies across the U.S. secure hundreds of millions in funding.

Sean earned his Bachelor of Science degree in Business Administration from Henderson State University.

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