The extra commission for non-recourse buys the buyer's credit risk and nothing else, so compare it with the expected credit loss you would otherwise keep.
Non-recourse factoring is cheaper whenever the expected credit loss it takes off your hands exceeds the extra commission it charges. On an illustrative 4,200,000 export invoice on 90-day terms, non-recourse at 0.55 per cent costs 12,600 more than recourse at 0.25 per cent, and at a 4.1 per cent annual buyer default rate it removes 34,416 of expected loss: non-recourse is 21,816 cheaper, and breaks even at a buyer default rate of 1.51 per cent a year. Neither structure covers disputes.
Worked in full in Trade Finance by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Both structures advance the same cash on the same day at the same discount rate. The only thing the exporter is buying with the higher commission is the buyer's credit risk. That makes the comparison a small expected-loss calculation, not a judgement about which product sounds safer.
The order is the one followed through the book: Harrowgate Instruments ships 4,200,000 of instrumentation to a buyer on 90 days and sells the receivable to a purchaser four days after the documents are delivered. The invoice is assigned, and the buyer approved by the purchaser, at shipment, so non-recourse cover runs from shipment even though the cash arrives later. The recourse commission is an illustrative quote; the other inputs are the book's.
| Input | Value |
|---|---|
| Invoice / cost of goods | 4,200,000 / 3,423,000 |
| Operating margin before finance | 306,600 (7.3%) |
| Buyer's terms | 90 days |
| Discount rate, on the face, actual/360 | 7.6% |
| Commission: non-recourse / recourse | 0.55% / 0.25% |
| Exporter's own cost of funds, to the purchase date | 8.4%, 109 days |
| Buyer default probability, a year | 4.1% |
| Loss given default | 62% |
| Days the buyer is on risk, shipment to payment | 116 |
| Dispute rate / loss on a disputed invoice | 2.25% / 34% |
1. What is identical in both. The exporter funds its cost of goods until the purchaser pays: 3,423,000 × 8.4% × 109 ÷ 360 = 87,058. The purchaser's discount is taken on the face for the 90 days: 4,200,000 × 7.6% × 90 ÷ 360 = 79,800. Documents cost 1,180. None of this depends on recourse.
2. The price of the protection.
Commission gap = 4,200,000 × (0.55% − 0.25%) = 23,100 − 10,500 = 12,600
3. What the protection is worth. Under recourse the exporter keeps the buyer's default risk for the 116 days from shipment to payment. Convert the annual probability to that period, then apply the loss:
PD over 116 days = 1 − (1 − 4.1%)116/365 = 1.32%
Expected credit loss = 4,200,000 × 1.32% × 62% = 34,416
Excel: =4200000*(1-(1-4.1%)^(116/365))*62%
4. What neither covers. A buyer who refuses to pay because a consignment is disputed has not defaulted, so the purchaser passes the loss back under either structure. Expected dispute cost: 4,200,000 × 2.25% × 34% = 32,130, carried in both columns.
| Line | Non-recourse | Recourse | Recourse + credit insurance |
|---|---|---|---|
| Own financing to purchase date | 87,058 | 87,058 | 87,058 |
| Discount | 79,800 | 79,800 | 79,800 |
| Commission | 23,100 | 10,500 | 10,500 |
| Documents | 1,180 | 1,180 | 1,180 |
| Insurance premium, 0.62% | 0 | 0 | 26,040 |
| Expected credit loss | 0 | 34,416 | 3,442 |
| Expected dispute loss | 32,130 | 32,130 | 32,130 |
| Total cost | 223,268 | 245,085 | 240,150 |
| Margin after finance | 83,332 | 61,515 | 66,450 |
Non-recourse is the cheapest of the three by 21,816 against plain recourse and 16,882 against recourse with a credit insurance policy covering 90 per cent of a loss. Insurance narrows the gap but cannot close it here, because its 26,040 premium is larger than the 12,600 the factor charges for the same risk.
Set the expected credit loss equal to the commission gap and solve for the annual probability:
4,200,000 × [1 − (1 − PD)116/365] × 62% = 12,600 ⇒ PD = 1.51% a year
| Buyer default, a year | Expected credit loss | Recourse total | Non-recourse total | Non-recourse saves |
|---|---|---|---|---|
| 0.50% | 4,145 | 214,813 | 223,268 | −8,455 |
| 1.00% | 8,304 | 218,972 | 223,268 | −4,296 |
| 2.00% | 16,666 | 227,334 | 223,268 | 4,066 |
| 4.10% | 34,416 | 245,085 | 223,268 | 21,816 |
| 8.00% | 68,098 | 278,766 | 223,268 | 55,498 |
The break-even moves with the commission gap. If the recourse quote is 0.15 per cent, the gap is 16,800 and non-recourse needs a buyer riskier than 2.02 per cent a year; at 0.35 per cent the gap is 8,400 and the break-even falls to 1.01 per cent. For an investment-grade buyer, recourse is usually the cheaper money. For a sub-investment-grade buyer in an export market, the factor's credit commission can be the cheapest credit protection on offer.
Treating non-recourse as no risk. The 32,130 of expected dispute cost is 10.5 per cent of the operating margin, and it stays with the seller whatever the factoring agreement is called. Non-recourse agreements also carry credit limits per buyer and exclude invoices the purchaser has not approved; anything above the limit is recourse in practice.
Comparing the quotes on rate alone. On the advance, the non-recourse quote is an effective 10.05 per cent a year, which looks dear against the exporter's 8.4 per cent facility. That comparison ignores both what the facility rate is charged on, the cost of goods rather than the invoice, and the credit loss the facility leaves behind. Compare total cost against the margin, as in the table, not one rate against another.
If the purchaser only takes the credit risk from the purchase date, the exporter keeps the buyer's risk between shipment and purchase under both structures, and the saving from non-recourse shrinks accordingly. Annual default probabilities are converted to the exposure period on 365 days; money is charged on actual/360, as trade finance banks quote it.
The six routes to payment, including the non-recourse purchase, are priced in the free workbook for this case. The effective rate of a factoring quote is worked in what is the effective annual cost of invoice factoring, and the insurance alternative in is trade credit insurance worth the premium.
Under recourse factoring the exporter must buy back, or repay the advance on, any invoice the buyer fails to pay, so the credit risk stays with it. Under non-recourse the factor absorbs the loss if the buyer becomes insolvent. On an illustrative 4,200,000 invoice the protection costs 0.30 per cent more in commission, 12,600.
No. Non-recourse covers the buyer's insolvency or protracted default, not a refusal to pay because the goods are disputed. That dilution risk stays with the seller under both structures. At a 2.25 per cent dispute rate and a 34 per cent loss when it happens, it is worth 32,130 on a 4,200,000 invoice, 10.5 per cent of the order's operating margin.
Not on these figures. A 0.62 per cent policy costs 26,040 and still leaves 10 per cent of each loss uninsured, so recourse factoring plus insurance totals 240,150 against 223,268 for non-recourse. Insurance beats non-recourse only when the extra commission for non-recourse exceeds the premium plus the share of loss the policy leaves uninsured.
This article is one calculation from Trade Finance. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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