Meaning
Financial clause mandates that a business must buy back unpaid invoices from a lender if the original customer fails to pay. Invoice discounting recourse shifts the risk of bad debt from the finance provider back to the company that issued the bill. The lender provides an immediate cash advance but retains the right to reverse the funding after a specified period of non-payment.
Credit Risk
Assessing the quality of the sales ledger is a continuous requirement for the lender in this arrangement. Because invoice discounting recourse exists, the cost of the facility is usually lower than non-recourse options where the lender accepts the full loss.
Payment Obligation
Funding is retracted by deducting the value of the overdue invoice from the next available draw-down or by requiring a direct cash refund. The presence of invoice discounting recourse means the business must maintain a healthy cash reserve to cover potential defaults by its own customers. This requires rigorous credit control and proactive collection efforts by the internal finance team.
Funding Reversal
Eligibility for future advances depends on the percentage of the ledger that remains within the agreed payment terms. Invoice discounting recourse functions as a security measure for the lender against the insolvency of the end-customers. It allows a business to access working capital based on its sales volume while remaining responsible for the ultimate collection of those funds and the management of customer relations.
