Recourse and non-recourse: what it means for business borrowing

In finance, recourse is the lender's right to come back to the borrower if the thing it lent against fails to pay. The term is most used in invoice finance, where it decides who carries the loss when a customer does not pay.

01Recourse and non-recourse factoring

02An example

A recruitment firm factors a £20,000 invoice and receives an £17,000 advance. The client goes into administration. Under recourse factoring, the firm repays the £17,000 (or swaps in another invoice). Under non-recourse factoring with that client approved, the factor bears the loss, subject to any excess in the agreement.

03What the factor checks

For non-recourse cover, the factor sets a credit limit for each customer and only protects invoices within it. Invoices to customers it has not approved, or above their limit, stay at your risk. Keep to the agreement's notification rules: if a customer is late, the factor usually needs to hear within a set time for the protection to apply.

A recruitment firm factors a £20,000 invoice and receives an £17,000 advance.

04Recourse elsewhere

"Limited recourse" lending, used in some property and project finance, limits the lender to the asset financed. A personal guarantee is a form of recourse to an individual. In any finance agreement, read what happens if the security or customer fails.

05How it affects borrowing

Recourse facilities are easier to get and cheaper; non-recourse suits businesses with a few large customers whose failure would hurt. You can also buy separate credit insurance. See invoice factoring for how both work, and invoice finance costs for what the protection adds. Any broker fee depends on the lender, with nothing to pay upfront.

06Related terms

• Bad debt protection
• Factoring
• Invoice discounting

07Sources

• Companies House: check a customer's filed accounts and status