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Many larger factors offer
only non-recourse factoring, in part because they can get credit insurance (which requires quite large factoring volume and pays for large losses), and also because of their location and the usury laws there. Many
larger factors are located in New York, Texas, California, and Florida, all of which have restrictive usury statutes.
To understand usury laws and working with (or around) them, remember their purpose: to
prevent excessive interest on loans. In other words, usury does not want you to charge too much when you loan money with the expectation of being paid back.
Factors make a point of stating they are not
“lending” money but buying an asset (invoices) and receiving a fee for their services (providing up-front cash and receivables management). However, when payment is never received the recourse factor still wants his
advance back and also the fee earned. Here factoring begins to look a lot like a loan, and possibly a usurious one at that. If this isn’t a loan, the reasoning goes, why does the factor want to be paid back? Doesn’t
that just make him a lender?
When a customer doesn’t pay due to insolvency or bankruptcy, a non-recourse factor takes the loss of both his fee and advance. Because he is not being “paid back” there is no loan
in place and no “interest” being charged. Thus usury is not at issue with the non-recoursefactor. He takes a loss and breaks no law.
Be aware that in the case of a disputed invoice (rather than one unpaid
due to customer insolvency), non-recourse is contractually waived and the factor still has the right to payment from the client. That is not a loan either; it’s simply a matter of resolving a dispute. Factors who
tout themselves as non-recourse still are entitled to recourse with disputed invoices, so be sure clients understand that –
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especially if you are a
recourse factor competing for business with a non-recourse factor.
As long as your factoring operation is never involved in court the issue of usury probably won’t come up. Hopefully this will be the case
with small factors. With large factors, lawsuits frequently arise in cases of nonpayment because the dollars involved are large. Suing for payment is common among large factors because it may be the only way they
get paid by a problem account. (See the last issue’s
article about this subject.)
If you do find yourself in court (either as a plaintiff or defendant)
and the issue of your rates comes up and you’re a recourse factor operating where usury laws are strict, it’s up to the judge to decide if you’re providing loans. If the judge decides you’re just lending money and
your rates are usurious, you may face stiff penalties.
So to answer your questions:
(1) Yes, a non-recourse
factor is off the hook for usury because he will take a loss in the case of an insolvent debtor, and does not get paid back “principal” or charge “interest.” This means non- recourse factors too small for credit
insurance must be very careful to accept only solvent and creditworthy customers, and be prepared to take a loss when nonpayment results from customer insolvency.
(2) Non-recourse gets you
“around” usury laws because you’re not charging “interest” when a “loan” does not pay. You are in effect taking a loss on a “bad loan.” Therefore the crux of the usury/recourse/non-recourse issue is not how much
you’re charging for fees (admittedly the same whether recourse or non-recourse), but whether you’re trying to collect in the case of nonpayment.
Jeff Callender
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