Recourse vs non-recourse factoring, and bad debt protection

When you set up an invoice finance facility, one line in the offer letter decides who is left holding the loss if a customer goes under: whether the facility is recourse or non-recourse. It sounds like a technicality. It is actually the difference between a bad debt being an inconvenience and a bad debt being a cash-flow event that threatens your own solvency.

Most facilities are quoted on a recourse basis by default, because it is cheaper. Non-recourse, sometimes sold as bad debt protection bolted onto a recourse facility, costs more and comes with conditions that catch directors out. This guide covers what each one does, what is and is not covered, how it is priced, and who should pay for it.

What recourse factoring actually means

With recourse factoring, the lender advances the bulk of an invoice, typically 85% to 90%, and collects payment from your customer. If the customer does not pay, the risk stays with you. After an agreed period, usually 90 to 120 days past the due date, the lender recourses the debt: it takes the advance back, either by debiting your account or reducing the funds on your next draw.

The recourse period matters. A 90-day period gives you three months past the due date to collect before the advance is clawed back; a 120-day period gives more room for a slow payer. It is worth negotiating, not accepting.

What non-recourse factoring actually means

With non-recourse factoring, the lender carries the risk of an approved customer failing. If that customer becomes insolvent, the lender absorbs the loss rather than clawing back your advance. In practice this is almost always backed by trade credit insurance, held by the lender or taken out by you and assigned to them.

The critical word is approved. It does not mean every invoice is covered. It means invoices owed by customers the insurer has approved, up to a set limit for each one, are protected against genuine insolvency. Anything above the limit, or owed by an unapproved customer, still sits with you.

Approved debtors and per-customer credit limits

Before cover applies, the insurer assesses each of your customers and sets a credit limit. That limit is the maximum protected exposure to that customer at any time, and understanding it is the whole game with non-recourse.

• A strong, well-rated customer might get a generous limit that comfortably covers your normal balance with them.
• A weaker customer might get a low limit, or none at all, so your exposure to the very customers most likely to fail is the least protected.
• Limits can be reduced or withdrawn mid-facility if the insurer's view of a customer worsens, so cover is not fixed for the life of the agreement.

Non-recourse is not a blanket comfort blanket. It protects your good, high-value customers well and often leaves the risky tail exposed. Read the limits, not the headline.

What is covered, and what is not

Bad debt protection is designed for one thing: a customer that genuinely cannot pay. It covers insolvency, such as administration, liquidation or receivership, and protracted default, where a customer never pays within a defined period despite being pursued.

It does not cover a disputed invoice. If your customer withholds payment because they claim the goods were faulty, the work was incomplete, or the invoice is wrong, that is a commercial dispute, not a bad debt, and cover falls away until it is resolved. This is the most common reason a director thinks they are protected and is not.

Non-recourse protects you from a customer that cannot pay. It does not protect you from a customer that will not pay because they are arguing with you. Insolvency is covered, disputes are on you.

Other common exclusions include invoices raised outside your normal terms, sales to related companies, and debts above the approved limit. Getting your paperwork, delivery proof and terms right is what keeps a claim payable.

How bad debt protection is priced

Non-recourse cover is charged as an extra on the service fee. Where a recourse service fee might sit at 0.5% to 1.5% of turnover, adding bad debt protection typically lifts that by roughly 0.3 to 1.0 percentage points, depending on your sector, customer spread and claims history. Sectors with volatile customers, such as construction subcontracting, cost more or attract tighter limits. The discount fee on drawn funds is usually the same on both bases, so the service fee is the number to compare across quotes.

A worked example: a £40,000 customer fails

Picture a business on an 85% advance rate. One customer owes a single invoice of £40,000, within terms, when it suddenly goes into administration.

Under recourse, the lender has already advanced 85% of the invoice, which is £34,000. Once the recourse period passes with no payment, the lender claws back that £34,000 from your available funds. You are down the full £40,000 of value: the £34,000 returned plus the £6,000 reserve you never received. That clawback hits when you can least afford a surprise.

Under non-recourse, assuming that customer had an approved credit limit of at least £40,000, the insolvency is a covered event. The lender does not claw back the £34,000. A claim is paid, and once the policy excess is applied, typically around 10% of the loss, you keep the advance and carry roughly £4,000 rather than £40,000.

The difference on this single invoice is around £30,000 of cash saved. If protection cost an extra 0.5% on £2m of turnover, that is £10,000 for the year. One covered failure of a meaningful customer can pay for several years of the premium.

Who should pay for non-recourse, and who should not

Non-recourse is not automatically worth it. Whether it earns its keep depends on your customer profile.

1. If you have a concentrated ledger, where losing one or two large customers would seriously wound the business, protection is usually worth paying for. The premium buys resilience against the event that could sink you.
2. If you sell into a volatile sector, or you are winning customers you cannot easily credit-check yourself, the insurer's underwriting and monitoring is a genuine second opinion, not just cover.
3. If you have a broad spread of many customers, each a modest share of turnover, the maths is weaker. No single failure would be catastrophic, so you may be paying to insure a risk you could absorb.

A middle path exists too. Some lenders offer protection on named customers only, so you insure your largest exposures and self-carry the rest for a fraction of the cost.

Recourse against non-recourse is not a question with one right answer. It depends on your ledger concentration, the strength of your customers, and how much a single failure would hurt. Pricing and credit limits also vary widely between the specialist invoice finance funders. If you would like a straight assessment of which basis fits your customer book, and what the protection would realistically cost, speak to our invoice finance team. As a commercial finance broker covering the specialist invoice finance lenders, we can compare the recourse terms and the bad debt cover across the market and set out the trade-off in plain figures, so the decision is yours.