Non-recourse factoring, also known as without recourse factoring, is a financial arrangement where a business sells its invoices to a factoring company (factor) and transfers the risk of non-payment by the customers to the factor. This means that if the customers fail to pay the invoices, the factor bears the loss, not the business. This type of factoring can be particularly beneficial for businesses in the UK seeking to improve cash flow while mitigating credit risk.

Key Aspects of Non-Recourse Factoring:

1. Definition:
   • Non-recourse factoring is a type of invoice financing where the factoring company purchases the business’s invoices and assumes the risk of non-payment by the customers. The business receives immediate cash for its invoices, and the factor handles the collection process.
2. How It Works:
   • Invoice Submission: The business sells its invoices to the factoring company.
   • Advance Payment: The factoring company advances a percentage of the invoice value, typically 70-90%, to the business.
   • Collection: The factoring company collects payment from the customers.
   • Final Payment: Once the customers pay the invoices, the factor pays the remaining balance to the business, minus the factoring fees.
   • Non-Payment: If a customer does not pay, the factoring company absorbs the loss, not the business.
3. Advantages:
   • Risk Mitigation: The factoring company assumes the credit risk, protecting the business from potential bad debts.
   • Improved Cash Flow: Businesses receive immediate cash for their invoices, improving liquidity and enabling them to meet operational expenses and invest in growth.
   • Outsourced Collections: The factor handles the collection process, saving the business time and resources.
   • Credit Management: Factoring companies often provide credit checks and monitoring services, helping businesses assess customer creditworthiness.
4. Disadvantages:
   • Higher Costs: Non-recourse factoring generally has higher fees compared to recourse factoring due to the added risk for the factor.
   • Selective Approval: Factoring companies may be more selective about the invoices they purchase, often requiring strong creditworthy customers.
   • Customer Relations: Involving a third party in collections may impact customer relationships if not managed carefully.
5. Fee Structure:
   • Factoring Fee: This is typically a percentage of the invoice value, reflecting the cost of the factoring service and the risk assumed by the factor.
   • Advance Rate: The initial percentage of the invoice value paid to the business upfront.
   • Reserve: The remaining balance held by the factor until the customer pays the invoice.

Example of Non-Recourse Factoring:

A UK-based manufacturing company sells £100,000 worth of products to a retailer with payment terms of 60 days. To improve cash flow and mitigate credit risk, the company uses non-recourse factoring with a factor that offers an advance rate of 85% and a factoring fee of 3%.

• Advance Payment: £100,000 × 85% = £85,000
• Factoring Fee: £100,000 × 3% = £3,000
• Remaining Balance: £100,000 – £85,000 – £3,000 = £12,000

The manufacturing company receives £85,000 immediately. If the retailer pays the invoice, the factor releases the remaining £12,000 to the company. If the retailer defaults, the factor absorbs the £100,000 loss.

Conclusion:

Non-recourse factoring is a valuable financial tool for UK businesses looking to improve cash flow and reduce credit risk. By transferring the risk of non-payment to the factoring company, businesses can focus on their core operations and growth without worrying about bad debts. However, it is essential to consider the higher costs and potential impact on customer relationships when opting for non-recourse factoring.