Meaning
Financing arrangements with full borrower liability require the company to repurchase any unpaid receivables or collateral from the lender if a default occurs. Under a recourse credit facility, the lender does not assume the risk of customer defaults, meaning the borrower must replace any invoice that remains unpaid after a specified period. This structure protects the lender’s capital and holds the borrower responsible for customer creditworthiness.
Borrower Risk
Financial responsibility remains with the manufacturer even after the invoices have been sold to the lender. If a major customer fails to pay due to bankruptcy or a quality dispute, the recourse credit facility forces the borrower to buy back the unpaid invoice or face a reduction in their borrowing base. This obligation can create a severe cash flow squeeze if several customers default simultaneously, highlighting the need for rigorous credit screening of all buyers before entering into large-scale supply contracts.
Funding Advantages
Lenders are willing to offer lower interest rates and higher advance rates when the borrower assumes the ultimate credit risk. A recourse credit facility is often the most cost-effective way for a growing manufacturer to secure the working capital needed to purchase raw materials and scale up production. This structure is particularly useful when the company’s customers are large, well-established firms with low default risks.
Audit Standards
Rigorous credit checks on both the borrower and their customers are performed before funding is approved. The lender monitors the aging of the receivables to ensure that the recourse credit facility remains backed by high-quality assets. Any invoice that is overdue by more than ninety days is automatically excluded from the borrowing base, requiring the borrower to provide fresh collateral.
