Factoring companies have two primary types of agreements when it comes to funding your freight bills: recourse and non-recourse factoring. There are pros and cons to both types of agreements. As a client of a factoring company, you must weigh these options and decide what is best for you and your company in the long term. This tug of war begins with the carrier understanding what the differences are between them.
Recourse factoring is the most common type of agreement with factors. It allows for lower factoring fees, greater flexibility, higher credit limits, increased cooperation between carriers and factors, uninterrupted cash flow, flat rates, and all-around simpler contracts.
In recourse factoring the carrier sells the invoices to the factoring company for a specific amount of time. If the invoice ages beyond that specific time, the client is required to buy the invoice back from the factor. Because of this “buy-back” requirement, the carrier takes on more responsibility for the invoice payment. There is a bit of a paradox here because with more responsibility for each invoice to the carrier, the factoring company can allow more business operating freedom. Recourse factoring often provides all the same risk assessment and archiving tools available to non-recourse customers, but with added flexibility and applications due to a larger unrestricted market pool of potential brokers and shippers. Restrictions are reserved only for only the riskiest brokers. Credit limits are more flexible by several orders of magnitude. Communication and cooperation between the factoring company and the carrier increase due to the shared goal of getting invoices paid.
This shared mission of getting invoices paid is an important point. Recourse factors want invoices to pay quickly—it helps their margins. Time is money. On the carrier’s side, it is also in their best interest to have invoices paid due to the possibility of a buyback. So, what ends up occurring is both the factor and the carrier are making their best efforts to ensure effectiveness and efficiency on every invoice. Both the factor and the carrier have a common goal, shared responsibility, and increased flexibility in overall operations. Through this shared goal recourse model, we have helped hundreds of carriers succeed and become consistently profitable.
At face value, non-recourse agreements are sold on the idea that the carrier takes zero liability for non-payment of any invoice aged beyond established terms. Sales pitches give the impression that the factoring company takes all of the liability and risks of funding invoices. This comes at a cost though, higher fees and more restrictions on operations are the most common areas this risk is mitigated or margins are made back by the factor.
Let us slow down for a moment here. Can a carrier operate with essentially zero-risk of bad debt if they have a non-recourse factoring contract? If anything at all goes wrong with an invoice does the factoring company dig into their own pockets to cover any losses? Does this sound too good to be true? That is because it usually is.
The fact is that “non-recourse” is a bit of a misnomer. Contracts often outline very specific situations in which the factor takes on the risk. The factor typically has a short-list of allowed brokerages and shippers, along with load boards that are limited to just those approved brokerages. There are often discounts for larger and approved brokerages on this list to encourage carriers to use those specific customers.
From the paragraphs above, it is easy to see how strenuous the underwriting process is that each invoice must go through before being funded. Eventually, this process can begin to restrain the main benefit of factoring—cash flow! The slowing cash flow, restricting business freedom, and stringent requirements for every invoice lead us to advise carriers against most “non-recourse” factoring agreements.
Be sure to read any non- or limited recourse factoring agreements very closely and investigate any stipulations that might have been tagged onto regular day-to-day operations!