Non-recourse loan - English Nonrecourse Loan, is a type of loan structured around the lender's ability to recover if the borrower defaults. A non-recourse loan allows the lender to use only those assets that were agreed upon in the agreement to repay the loan in the event of borrower default. Typically, this means that the lender can only recover its losses by selling the borrower's property that serves as collateral (often the property for which the loan was issued), and cannot make any other property or financial claims. Such a loan can protect the borrower's other assets if he faces financial difficulties in repaying it.

In most cases, a non-recourse loan is a mortgage, and the possibility of obtaining it depends on the legislation of a particular country. For example, in the USA, some states legally guarantee borrowers the opportunity to refuse a mortgage if its amount exceeds the value of the property. The only recourse for the lender in this case is the sale of the property serving as collateral for the loan. If, as a result of the sale, the lender cannot fully recover its losses, it can no longer sue the borrower for additional compensation.

It should be noted that not all countries have legislation that allows for non-recourse loans. In such countries, there is always the possibility that a borrower will lose his personal assets if he defaults on a recourse loan. Therefore, when making a mortgage decision, it is advisable to seek advice from a mortgage broker or financial advisor, if possible.

A non-recourse loan has many benefits. The main thing is that in the event of default, the borrower risks losing only the property that serves as collateral for the loan. However, to conclude such an agreement, the bank can put forward quite strict conditions and high requirements for the borrower. For example, they may require the borrower to have a certain amount in a savings account or make a higher down payment than a similar recourse loan. This is because lenders want to protect their assets by making sure they can fully recoup their losses if the borrower defaults on its obligations. In other words, they want to receive a certain guarantee that the amount that will be received as a result of the sale of the property will fully compensate for the losses incurred.

The most dramatic example of what can happen to non-recourse mortgages if property values ​​plummet is the 2008 US mortgage crisis. A large number of borrowers, for various reasons, defaulted on their obligations, which led to huge problems for mortgage banks and the US banking system as a whole. As a result, the banking system suffered hundreds of billions of dollars in losses. To reduce risks in the future, lenders have significantly tightened requirements for borrowers who want to obtain a non-recourse loan.

Factoring with recourse is one of the two main types of factoring based on the terms of payments (mutual settlements) between the factor and its client.

Regression in this case is the return of the money provided by the FC. The client returns the money to the company if the debtor (his buyer) refuses to pay or delays it beyond the agreed period.

That is, the right to receive money back arises from the bank (financial agent) if the money for the receivables assigned to it is not received within a specific period specified in the agreement.

In other words, in this scheme, the client (supplier of goods that he sells on a deferred basis) insures his liquidity risk(danger of delay, which jeopardizes business processes). The client deals with credit risk, that is, the possibility of complete refusal of obligations or insolvency of the buyer, independently.

Advantages and disadvantages of regressive factoring

Obviously, relationships of this type carry less risk for the factor; accordingly, the commission for services in this case is much lower, they are simply more affordable.

Also, financial companies and banks are ready to pay 100% of receivables immediately after concluding a contract: after all, their return is guaranteed.

The cons are also pretty obvious. In addition to the risk itself, the client is also forced to take part in managing receivables, spending his own resources on this. It is often more expensive to employ a specialist in accounts receivable management than to farm it out.

Therefore, it is not entirely correct to raise the question of the disadvantages and advantages of non-regressive and regressive types of factoring. It’s just that these are two close, but quite different services, each of which is better suited to a certain type of situation.

Factoring without recourse

Factoring without recourse– a type of factoring in which the risk of non-payment of debt is assumed by the organization providing factoring services.

As with any type of factoring, the seller fulfills its obligations to supply or perform services by providing the buyer with a deferred payment. In this case, the factoring organization buys the right to claim the debt from the supplier at a discount. The risk that the buyer will not pay on time or will not be able to repay the debt at all falls entirely on the factoring company.

Non-recourse factoring costs more for the seller than , because the cost of the service must include the risk of non-payment. In addition, by actually providing the debtor, the factoring company is forced to monitor the creditworthiness of various organizations - the supplier's clients, which in itself is not cheap.

The following practice has developed in our country. Typically, the seller receives 90% of the payment due. The remaining 10% minus commission is paid only when the debtor repays the debt. If he does not pay, the balance is not paid. Thus, the supplier risks only this 10%, and not the entire amount. The factoring company, in turn, receives an insurance premium for its risk.

Non-recourse factoring services are used less frequently in our country: according to various estimates, from 8% to 14% of the total number of such operations.

See what “Factoring without recourse” is in other dictionaries:

FACTORING WITHOUT REGRESSION RIGHT- Without the right of recourse, when the factor finances the supplier without the right to subsequently return monetary claims to the supplier in the event of non-payment by the payer. At the same time, the risks of factoring operations are borne by the factor itself (Procedure for banks... ... Law of Belarus: Concepts, terms, definitions

Factoring- (English factoring from the English factor intermediary, sales agent) is a range of services for manufacturers and suppliers conducting trading activities on deferred payment terms. Three persons are usually involved in a factoring operation: factor... ... Wikipedia

- – financial service of a specialized company or bank. In general, factoring is used as follows: the supplier sells goods to the buyer without requiring immediate payment for it. For the buyer of this product, the seller is paid by a specialized... ... Banking Encyclopedia

- – a type of factoring in which, in the event of non-payment of debt by the buyer of products or services, the amount of debt is written off from the supplier’s creditor. Since the risk when using factoring with recourse is significantly less than when using factoring without... ... Banking Encyclopedia

FACTORING- (English factoring from factor - agent, factor, intermediary) - a type of trade commission operations associated with the assignment by the client of the supplier to a specialized institution (factoring company or factoring department of the bank) ... ... Financial and credit encyclopedic dictionary

FINANCE AGREEMENT FOR ASSIGNMENT OF MONETARY CLAIM (FACTORING)- in accordance with Art. 153 BC, under a financing agreement for the assignment of a monetary claim (hereinafter referred to as the factoring agreement), one party (factor), a bank or non-banking financial institution, undertakes to enter into ... ... Legal Dictionary of Modern Civil Law- (International settlements) Settlements for international trade transactions Basic forms and legal features of international settlements, systems for their implementation Contents Contents Section 1. Basic concepts. 1Definitions of the subject being described... ... Investor Encyclopedia

For business

Factoring without recourse

Requirements

• A legal entity has the form of an LLC or individual entrepreneur.
• The business was registered at least six months ago and is actually running for at least this period.
• There is no evidence of a negative credit history in any bank.
• Depending on the financial condition, a guarantee may be required from individuals - business owners.
• There are no restrictions on the number of debtors.

More about non-recourse factoring

Non-recourse factoring is a type of factoring in which a specialized company or bank finances a purchase and sale transaction with a deferred payment, while the risk of non-payment by the buyer of the debt is borne by the factor. Non-recourse factoring has a higher cost than recourse factoring. Before financing a transaction, the factoring company conducts a comprehensive analysis of the debtor's solvency.

Scheme of interaction between participants

A non-recourse factoring transaction consists of the following stages:

1. The supplier ships goods or provides services to the buyer with deferred payment.
2. An agreement for the assignment of the right to a monetary claim is drawn up. The notification must be signed by the buyer, confirming his consent to transfer payment to the factor's bank account.
3. The factor transfers to the supplier up to 100% of the transaction amount, minus the discount.
4. The buyer pays the factor 100% of the debt.

Advantages of non-recourse factoring

Non-recourse factoring makes it possible to make deliveries with deferred payment reliably and safely. Although this type of service is not the most widespread in the domestic market due to relatively high tariffs, non-recourse factoring is still attractive for business for a number of reasons:

• The factor removes credit and liquidity risks from the client. If the buyer does not fulfill obligations partially or completely, or delays payment, the factor assumes the associated risks for the return of funds, including legal proceedings. The client is protected from financial losses.
• The organization's working capital is replenished, its deficit is reduced, cash gaps are reduced to a minimum, sales volumes are growing and their geography is expanding.
• The supplier receives up-to-date information about the real solvency of the buyer, based on a thorough analysis of his creditworthiness.
• Non-recourse factoring provides an opportunity for an organization to reduce administrative costs associated with managing accounts receivable.

Market relations between supplier and buyer always depend on the material base. Basically, the shipment of products and the provision of services are carried out on an advance payment, full or partial. If the buyer is able to pay the application in full, then there are no problems with shipment. Some entrepreneurs work only on funds received from sales and prefer the option of deferring payment for a specific period. A supplier who is not confident in the integrity of the customer may refuse to work under such a scheme. To eliminate risks, business people turn to a third party for support – a factoring company (factor). One of the services of such an organization is non-recourse factoring. How the scheme works and how often it is used in practice, read more in the article.

The essence of the deal

Non-recourse factoring is a type of financial assistance that a factor provides to a client who has applied. The supplier of goods or services acts as the client if a transaction is planned with the buyer on deferred payment terms.

An application is made for a certain amount. The buyer wants to pay for the shipment not immediately, but in a month. In order for the seller not to lose money in trade turnover, he turns to a credit institution, which becomes an intermediary in the transaction. The factor pays the client up to 90% of the buyer's debt and accepts the right to receive receivables. The transaction scheme looks like this.

The nuance of the transaction is the fact that the credit institution assumes the risks during non-recourse factoring. The client remains with the money even if the debtor is unable to pay off the debts.

The supplier's losses are minimal - 10-15% of the transaction + commissions to a third party. You will not have to return the money to the factoring company, as is the case.

Stages of agreement between the parties

To provide factoring services without recourse, the client must submit an application for an upcoming transaction on deferred payment terms. Information about the customer and the preliminary amount of shipment must be provided.

1. The creditor checks the solvency of the future debtor to exclude fraud. Financial risks fall on the shoulders of a third party. The waiting period for a response depends on the speed of obtaining complete information about the buyer. If the contract for the provision of factoring without recourse is concluded with the participants not for the first time, the procedure ends quickly.
2. After approval of the debtor's solvency, the supplier draws up documents for shipment: invoices for goods or services, invoices, supply agreement indicating the deferred payment period.
3. If the goods have been paid for in part, the payment is indicated in the contract. Factoring financing will be done based on the debt calculation.
4. After shipping and signing the forms, the seller is sent to the third party with all the documents for the transaction. An agreement (sample) is concluded under which the right is transferred to the creditor.
5. The client receives financing. Typically the amount does not exceed 90 percent of the customer's debt. The balance is returned after the debtor deposits the entire amount into the account of the credit institution.

If the outcome of events is positive, the funds minus the commission for the financing service are credited to the seller’s account. This concludes the deal.

The other side of the deal

Sometimes the ideal verification scheme fails - the debtor does not repay the deferment on time. Under a regressive system, the client is obliged to compensate the creditor for losses. But in this case, the debt repayment procedure is handled by the factor, because according to the contract, the client is insured against such risks.

The credit institution sends a notice to the debtor so that the debt is repaid. In this case, the injured party has the right to receive interest, because the debtor was granted a loan and the money must work.

The loss for a customer who receives installment financing for shipment is 10 or 15%, which the transaction intermediary will underpay if the debtor becomes insolvent.

Advantages and disadvantages of the financing service

Non-recourse financing is in less demand among entrepreneurs than the recourse option. This is due to the high commission fee on the part of the entrepreneur who applied and the loss of 10-15% in case of violation of agreements. This is a disadvantage, but not as significant as the loss of all money and legal proceedings with the debtor.

The advantages of non-recourse financing are as follows:

• Checking the client's solvency is a factor.
• Eliminating the risk of losing large amounts of money.
• A third party monitors the terms of the contract, which simplifies the work of the supplier itself.
• Opportunity to expand the customer base and increase the company's turnover.

Despite the fact that non-recourse financing has more advantages than disadvantages, the number of applications to a credit institution under this scheme is less. Entrepreneurs rely on the integrity of their partners.

Let's sum it up

In the economic situation in the country, the factoring service without refund by the client in case of problems with the debtor is relevant for business people. Although the discount for the transaction is high, it is justified by the risks from which the client is protected. It's better to get 90 percent than to be left with nothing and get bogged down in lawsuits to recover debts.