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Understanding the Two Types of Factoring Arrangements in Finance: Recourse & Non-Recourse Factoring

There are two types of factoring arrangements in finance: recourse factoring and non-recourse factoring.

Recourse factoring is a type of factoring where the factor buys the company's invoices, but the company retains the risk of non-payment by its customers. In other words, if the customer does not pay the invoice, the company is responsible for repaying the factor for the amount advanced. Recourse factoring is usually less expensive than non-recourse factoring, as it places the risk of non-payment on the company rather than the factor.

Non-recourse factoring, on the other hand, is a type of factoring where the factor assumes the risk of non-payment by the company's customers. If the customer does not pay the invoice, the factor absorbs the loss, and the company is not responsible for repaying the factor. Non-recourse factoring is usually more expensive than recourse factoring, as the factor assumes a higher level of risk.

In general, non-recourse factoring is preferred by companies that are concerned about the creditworthiness of their customers or have a higher risk of non-payment. However, it is important to carefully consider the costs and fees associated with both recourse and non-recourse factoring before making a decision.



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