Freight factoring is a decision that can keep a trucking company in business. Given the choice between defaulting loans and losing employees, compared to working with a third-party company, it’s a no brainer. When you consider the potential short-term and long-term impacts, it’s easy to see why it is so common.
Unfortunately, a common issue in the trucking industry is customers not paying their invoices on time, or going bankrupt. This fact is partly why freight factoring is so popular. But who takes on the risk for those delinquent customers depends on the type of factoring you choose.
Those two options are recourse vs. non-recourse, and it the difference is one of the most important things to understand about freight factoring.
What is Recourse Factoring?
Recourse is the most common kind of factoring. This type of contract makes you responsible for covering the cost of any invoices that customers fail to pay, even if the factoring company has taken over. The company may charge that invoice back to you, or you can replace it with an unfunded invoice.
What is Non-Recourse Factoring?
In this form of factoring, the factoring company accepts the risk of non-payment by your customers. So if your customer files bankruptcy, or is unable to pay the invoice, the factoring company gives you a credit guarantee that they will be responsible for those lost funds.
So how do you choose between the two?
The choice between recourse and non-recourse factoring comes down to what types of clients you work with, and how much risk you are willing to take on for yourself.
Recourse factoring is more affordable, and is a good choice if you work with trustworthy customers. If your client fails to pay, you will have to repurchase the invoice from the factor to cover its cost. While the initial collection will be the responsibility of the factoring company, if the customer is delinquent, you may need to contact them.
However, trustworthy companies go bankrupt all the time, so you can never know for sure if your invoice will be paid as directed. This is why recourse puts more risk on the trucking company, instead of the factoring company. If you are looking for fast cash are willing to take the risk for potentially incomplete payments, recourse factoring should work for you.
Non-recourse has a higher fee than recourse, but puts the risk on the factoring company. The factoring company will be the ones to take action if your clients default and fail to pay on time. This is beneficial for your business if you don’t have the time, money or resources to take on the responsibility of collections. Your credit will not be at risk if your client goes bankrupt or is unable to make the payment.
It is understandable, then why this is a more expensive option. The factoring company takes on the risk of delinquent clients, not you. For some industries, this is a very helpful solution. If you have had issues in the past with clients who have not fulfilled their payments, non-recourse can reduce the stress.
However, keep in mind that the factoring company can deny working with certain clients, so you aren’t able to put any questionable invoices on the factoring company.