One common question carriers have when considering trucking factoring is the difference between recourse and non-recourse factoring. What do these two trucking factoring options really mean for you and your bottom line? And I am not talking about top-level basic definitions. I am talking about how it truly affects you, your business, and your bottom line. Let’s start with basic definitions of each:
What is Factoring?
Factoring is when a trucking company sells its invoices to a factoring company for immediate access to working capital. Click here, for more on how trucking factoring works.
What is Recourse Factoring?
With recourse factoring, if the invoice is not paid by the trucking company’s broker or shipper, the trucking company assumes responsibility for the unpaid invoice.
What is Non-Recourse Factoring?
With non-recourse factoring, if the invoice is not paid by the trucking company’s broker or shipper, the factoring company assumes responsibility for the unpaid invoice.
Non-recourse factoring often gives a false impression to many carriers. For many non-recourse means, if any customers do not pay an invoice, the factoring company will not ask for the money back. However, with non-recourse agreements, you really need to read the non-recourse clause in the contract VERY closely. The reason is they usually say that it will only apply to customers that are on the factoring company’s approved list of non-recourse brokers and shippers. That list usually includes names of large or established companies. In particular, the companies on the approved list will be household names with many employees and excellent credit. Specifically, all the clients who are extremely low risk. In fact, numerous small brokers will not be on the approved list and will not be covered under the non-recourse agreement.
Also, most non-recourse agreements will include a clause stating the company must be insolvent or legally out of business (bankruptcy) to be considered eligible. This sounds great, except for those brokers who simply disappear. Many times, these will not be eligible for non-recourse because they have not officially filed for bankruptcy.
Many carriers walk away from conversations with factors who offer non-recourse factoring, thinking that if my broker or shipper does not pay, for any reason, I am off the hook. However, non-recourse factoring is similar to purchasing a car with a 36,000-mile warranty. When something goes wrong, you find out the warranty does not cover many issues.
Additionally, most non-recourse factoring comes with a long-term contract and an auto-renewal clause. They are not intended to be easy to exit with many hoops to jump through. In contrast, carriers can easily find factoring companies that offer recourse factoring without auto-renewal clauses and long-term contracts.
One of the most significant differences between recourse and non-recourse factoring is the rate. Nearly all non-recourse agreements will be significantly more expensive. For example, many recourse factoring companies charge a rate of around 2.5-3%. In contrast, it is not uncommon to find non-recourse factoring rates around 5%. Unfortunately, many carriers who sign a non-recourse contract are paying a higher rate for something they may not be able to use. In fact, it is like having an auto insurance policy that covers you only on the second Tuesday of the month when it is raining.
Recourse Factoring vs. Non-Recourse Factoring quick overview
|Rate||Around 2.5-3%||Around 5%|
|Contract Length||None||Automatically Renews after a year|
|Customers it applies to||All||Only those on a set approved list by the factoring company|
|Who is responsible if the broker or shipper does not pay?||The trucking company||The factoring company (if it qualifies under certain criteria)|
With recourse factoring vs. non-recourse factoring, it really comes down to who assumes the risk for each invoice in the event of non-payment. It is imperative if you are considering non-recourse factoring to pay very close attention to the contract or have someone assist you, so you don’t have surprises in the end.