Recourse vs non-recourse factoring: who wears it when a customer never pays?

If a customer never pays a financed invoice, the answer to “who loses the money?” depends on one word in your contract. Under recourse factoring, you do: you repay the advance. Under non-recourse factoring, the lender absorbs the loss, but usually only when an approved customer becomes insolvent. Disputes and slow payers stay your problem.

That gap between what the name suggests and what the contract actually covers is where most surprises happen. Here’s how to read it.

What does “recourse” actually mean when you factor invoices?

When a lender advances money against your invoice, whether through factoring or any other form of invoice finance, it’s relying on your customer to pay. Recourse is the lender’s right to come back to you if that doesn’t happen.

In a typical recourse facility:

• each invoice has a set period to be paid, often counted from the invoice date
• if it’s still unpaid at the end of that period, it drops out of your eligible ledger
• you then repay the advance against it, or the lender reduces your available funds by that amount
• you keep chasing the customer, and any money you eventually recover is yours

Most invoice finance and debtor finance in Australia works this way. It’s cheaper because the lender isn’t insuring your customers; it’s simply lending against them.

What does non-recourse factoring cover, and what doesn’t it?

Non-recourse factoring means the lender takes on the credit risk of your customer for approved invoices. If the customer can’t pay because it’s gone broke, the lender wears the loss instead of you.

The fine print is where the protection narrows. Here’s how cover usually splits:

Situation	Recourse	Non-recourse (typical)
Customer goes into liquidation or administration	You repay	Lender usually absorbs, within the approved limit
Customer is solvent but pays very late	You repay after the agreed period	Usually you, unless the contract says otherwise
Customer disputes quality or delivery	You repay	You repay, disputes are almost always excluded
Invoice exceeds the customer’s approved limit	You repay	The excess usually falls back to recourse
Customer is a related party	Usually ineligible	Usually ineligible
Invoice was wrong or credit-noted	You repay	You repay

So the realistic picture is that non-recourse protects you from one big event, a customer’s insolvency, and not much else. That can still be valuable. It just isn’t a promise that every invoice will be paid.

Why does non-recourse cost more and come with more rules?

Because the lender is carrying more risk, it needs more control. Expect:

• Customer-by-customer approval. Each customer gets its own credit limit. Sell above it and the extra is funded on recourse terms, or not at all.
• Higher fees. The lender is pricing in potential losses, and sometimes the cost of insuring them.
• Credit insurance behind the scenes. Many non-recourse products are backed by trade credit insurance that the lender holds, so its insurer’s view of your customers shapes your limits.
• Notification requirements. You may need to report overdue invoices or bad news about a customer quickly. Missing a deadline can void the cover.
• Disclosure. Non-recourse is usually a disclosed product, so customers know the lender is involved.

If you’re comparing the two, start a short enquiry and tell us about your biggest customers. A real person can talk you through which structure suits your ledger.

What happens if a customer goes broke after paying you?

This catches some owners off guard, recourse or not. When a company goes into liquidation, the liquidator can look back at payments it made before collapse. ASIC’s guide for creditors explains that unfair preference claims can reach back six months before the liquidation is taken to have begun. Under the simplified liquidation process, the window is three months and only payments to an unrelated creditor totalling more than $30,000 can be recovered.

If a liquidator recovers a payment that cleared a financed invoice, the lender may treat that invoice as unpaid again. Read how your contract handles it. Non-recourse cover doesn’t automatically extend to clawbacks.

ASIC also sets out the order in which money is paid out in a liquidation, with costs and employee entitlements ahead of unsecured creditors. Trade creditors are usually unsecured, which is why recovery from an insolvent customer is often slow and partial.

Our guide on what to do when a customer goes into administration walks through the first steps in more detail.

Which suits your business: recourse or non-recourse?

Ask yourself three questions.

How concentrated is your ledger? If one customer is a big slice of your sales, its failure could sink you. Non-recourse, or separate credit insurance, starts to make sense.

How reliable are your customers? A spread of established customers with long payment histories rarely go under all at once. Recourse is usually enough.

Who handles your credit control? Recourse facilities reward good credit control because you avoid buy-backs. If you don’t have the time or staff for it, a factoring arrangement with collections included may help, recourse or not.

Could insurance do the job separately? Some businesses keep a cheaper recourse facility and buy their own trade credit insurance over the customers that worry them. That splits the two jobs, funding and protection, so each can be shopped on its own merits. It also means the cover stays with you if you later change lenders, rather than disappearing when the facility ends. The trade-off is an extra policy to manage and its own claim rules to follow.

An illustrative example

Illustrative only. A food packaging wholesaler sells to about 30 customers, but two distributors account for nearly half its invoices, about $200k a month between them. The owner is offered a recourse facility at a lower cost and a non-recourse facility at a higher cost.

Under the non-recourse offer, each distributor’s approved limit is lower than its usual monthly spend. That means a slice of every invoice to them would be on recourse terms anyway. The owner works out that the extra cost buys protection on most of the exposure to those two customers, but not all of it.

In the end the owner takes the recourse facility for the whole ledger and buys separate trade credit insurance over the two distributors. It’s more paperwork, but the protection matches where the risk actually sits.

What should you check in the contract before you sign?

Before you commit to either version, find these clauses and make sure you understand them:

1. The recourse period. How long an invoice can stay unpaid before it falls out of funding.
2. The definition of insolvency. Which events trigger non-recourse cover, and from what date.
3. Customer limits. What happens to invoices above an approved limit.
4. Notification duties. What you must report, and by when.
5. Disputes and credit notes. How quickly you must repay when a customer raises a dispute.
6. Clawbacks. What happens if a liquidator recovers a payment later.

If something isn’t clear, ask the lender to explain it in writing. business.gov.au’s guide on what to do when you haven’t been paid is also a useful reminder that strong contracts and clear terms are your first line of defence, whatever funding you use.

Worried about one customer bringing the business down?

If a single customer’s failure keeps you up at night, that’s worth acting on now, while the invoices are still being paid. The right mix might be invoice finance, insurance, a working capital loan, or a property-secured facility from $20k to $5m that doesn’t depend on any one customer at all.

The enquiry takes about 60 seconds, and there’s no credit check when you first enquire. We won’t send your details to a pile of lenders, so your phone stays quiet. A real person looks at your customers, your ledger and what’s worrying you, then calls to talk it through. Please answer the form accurately, especially about your largest customers, so we can point you to the right structure first time.

See what fits your ledger →