Recourse vs non-recourse: the risk you actually carry

Invoice finance is usually sold as a timing product. You have done the work, the customer has agreed to pay, and all that is missing is a few weeks of patience. In that framing, recourse barely registers.

It should. Recourse is the difference between moving money forward and taking on credit exposure, and the two are not the same product at any price.

The two versions

Under recourse, if the debtor does not pay, the funder comes back to you for the amount they advanced. You keep the risk of your customer defaulting; you have borrowed against it. Under non-recourse, the funder absorbs that loss. What you are buying is time, and the cost of a default is theirs.

Almost all invoice finance is recourse, because the funder usually has no appetite for being your credit decision maker. That is not a defect in the product — it is the product. Non-recourse arrangements exist, but they are priced accordingly and are less common in mainstream Australian business finance.

What recourse does to the arithmetic

If you are already carrying the risk of the invoice, funding it early does not remove that risk — it front-loads the cost of it. You pay a discount now on money you might get back anyway, and if the debtor does not pay you owe the funder regardless.

That makes the effective cost of a recourse deal closer in character to a business facility than to a one-off payment-timing service. The right comparison is not against doing nothing; it is against an overdraft or a business loan at a similar amount, priced at a similar rate.

On the calculator, this is why the advance rate matters so much. A funder advancing 80% on a recourse basis gives you $48,000 today and leaves $12,000 with them — money they hold, and will chase you for if the customer defaults. You have financed your own receivable, at a cost.

Security and personal guarantees

Recourse arrangements usually come with security over the debtor’s account or invoice proceeds, and sometimes a personal guarantee or a director’s guarantee. Both change what happens if things go wrong:

• Security over the debtor means the payment goes to the funder, not to you, even if your customer has already paid your invoice into a locked account.
• A personal guarantee means the funder can pursue your personal assets, not just the business. In a sole trader structure, that is the same money under a different name.
• Larger funders may take security over your other assets or a second charge on business assets, which can affect other lenders.

Any of these should be read, not skimmed. The point of a broker review is exactly this: someone licensed reading the contract terms alongside your actual numbers, rather than you reading a discount rate off an advert.

Where the risk concentrates

Not every debtor is equal, and funders price accordingly. An invoice to a large, established company with ordinary payment terms carries very different risk from one to a related entity, or to a customer with a history of slow paying. If your debtors are weak, the recourse feature is doing more work than the discount suggests — and the funder will either charge for it or decline.

How to read the offer before you sign

• Ask in writing whether the arrangement is recourse or non-recourse.
• Ask what security is taken over the debtor and whether a personal guarantee is required.
• Ask what happens to the withheld amount if the debtor pays late, or disputes the invoice.
• Ask what fees apply if the invoice is never collected — the recovery cost is often yours.
• Ask whether the discount is a minimum period or a true per-day charge.

Those five answers tell you more about the real cost of the deal than the discount rate does.

Sources

• Moneysmart — Small business finance
• ASIC — For business and companies