Why use recourse factoring vs non-recourse factoring

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Once a carrier has made the decision to use freight bill factoring to improve cash flow, it quickly becomes a choice between using recourse or non-recourse factoring. At first glance, non-recourse factoring presents an attractive benefit; the apparent absence of financial liability to the carrier once the freight bill is factored. However, my experience as an owner and president of an invoice factoring company is that the severe restrictions associated with non-recourse in effect negates real value to the carrier.

The inconvenient truth about non-recourse factoring

Non-recourse is perhaps the most misunderstood form of invoice factoring. It is generally implied that a non-recourse agreement protects the carrier against financial loss should a customer fail to pay their invoice for any reason. This in fact is far from the truth. The actual terms of a non-recourse factoring agreement state that the carrier is protected against loss in one circumstance only; failure of payment due solely to a customer becoming insolvent.

Understanding terms of the contract

Carriers need to understand the terms of their non-recourse agreement very clearly before committing to a signed contract. To complicate matters, many non-recourse factoring agreements do not spell out the full terms of the contract, but instead reference a set of additional terms that reside in an online document. It is left up to the carrier to navigate to this document, read it and understand it prior to signing an agreement.

The following definition has been copied from a publicly posted website containing the terms and conditions applicable to a non-recourse factoring agreement:

“Non-Recourse Credit Guarantee” – means the assumption by Purchaser (the factoring company) of the risk of non-payment on certain Purchased Accounts identified by Purchaser, so long as the cause of non-payment is solely due to an Account Debtor (the carrier’s customer) becoming Insolvent.

This definition clearly states that the only condition that protects the carrier from non-payment is if their customer is deemed to be insolvent. Any reason, such as a freight delivery dispute, poor quality documentation, or any other issue that prevents the customer from paying becomes the responsibility of the carrier. This is potentially a highly damaging circumstance to affect the carrier’s cash flow. Not only is the invoice amount to be repaid to the factor, but additional fees now become due. This is the point of reckoning, when carriers realize that non-recourse factoring works against their financial best interest. The minimal protection and higher costs of non-recourse factoring is like paying higher premiums on an insurance policy that provides little protection.

Recourse factoring is the preferred choice

Recourse factoring is by far the most cost effective and beneficial option, and therefore the most commonly used form of invoice factoring. Under a recourse agreement, should your customer fail to pay the invoice within the recourse period (usually 60 or 90 days) for any reason, the carrier must buy back the invoice. Although this sounds less than beneficial, it is in fact the preferred choice:

  • Recourse factoring is less costly: because the credit risk on a recourse agreement resides with the trucking company, the factoring fee is typically a full 1% less than for non-recourse factoring.
  • Charge backs and repayments are few: careful credit checks by the factoring company helps to identify and avoid hauling for poor credit worthy customers. Therefore the occurrence of charge backs and repayments are few and far between.
  • High collections success on freight bills: a reputable factoring company that services the trucking industry exclusively has extensive experience and trained professional staff to courteously pursue collections. The industry boasts a high success rate on freight bill collections.
  • Fewer credit restrictions: Recourse factoring provides fewer credit restrictions than non-recourse allowing the carrier to haul for a larger pool of customers.

Why pay the higher costs of non-recourse factoring?

Since the factoring fees for recourse factoring is less than non-recourse, and the occurrence of non-payment due to insolvency is statistically low, why would you agree to pay a higher fee? Just ask yourself this question: How many of your invoices have gone bad because your customer became insolvent? Probably the answer is “very few”. Does the rate of the incident warrant paying an additional 1% on every invoice you process? Armed with all the facts and considered carefully, recourse factoring is undoubtedly the optimum choice for invoice factoring for trucking.

Choosing a freight factoring company

The degree of control you hold in maintaining regular and predictable cash flow will have a determining factor on the success of your trucking company. Invoice factoring is now considered a mainstream financial strategy to improve cash flow and grow fleet operations. It is regarded as an important financial tool to leverage capital, improve collections, minimize risk and reduce expenditures.

As there are many forms of invoice factoring and many variations of terms and conditions that apply, it is important to be informed when making a decision as to which factoring company to choose. Simply put; freight carriers should choose truck factoring companies that provide specialized services for trucking companies.

For more information about freight factoring and cost saving services for the trucking industry, visit us at: ecapital.com or call 866-531-2615

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Charles Sheppard is the co-founder and President of Accutrac Capital, an industry leading invoice factoring company specializing in the trucking space. Charles oversees the daily responsibilities of sales & marketing, back office operations and portfolio management. Prior to starting the company, Charles Sheppard accumulated 15 years of accounting and financial services experience including 6 years at the senior management level within the trucking industry. Together with his partner Ken Judd, they share over 40 years in the trucking space, including hands-on experience managing, owning and operating successful trucking companies. Charles’ intimate knowledge of financial and accounting issues, especially as it relates to the transportation industry combined with a close association with industry experts affords him unique insights and valuable perspectives for truck company owners seeking to maximize profitability.

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