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 way these options and decide what is best for you and your company in the long term. This tug of war begins with the carrier understand what the differences are between them.
is the most popular agreement with factors simply put when a factor cannot collect on an invoice you as the client are required to buy the invoice back from the factor. The carrier takes on more risk because a freight client’s creditworthiness may be unknown, or the payment terms are slightly higher than the industry average. Factoring fees and requirements may also be lower and possibly have more flexibility within the recourse factoring agreement. It may give the carrier an advantage to work with a debtor who is established but, payment terms are consistently slightly higher than the industry average. Recourse factoring can also have its advantages of flexibility in the contract terms. Because the client takes on more of the risk, they tend to have a better factor fee, higher credit limits, and the ability to mitigate risk through a reserve which allows them to work with a customer that would normally not be approved by the factor ensuring uninterrupted cash flow. Recourse agreements are typically easier to understand due to less stipulations on the invoices themselves.
also known as “limited recourse”. the factoring company tends to take on more of the risk. Limited recourse factoring is just that “limited” non-recourse factors still do not take on the full amount of risk they just limit the kinds of recourse they want to pass onto the client. Additionally, each factor has their own stipulations in the contract for which a carrier may have to “repurchase” meaning buy the receivable back from the factor hence why it’s called “limited recourse”. Non-recourse rules such as by chance if a customer files bankruptcy their client may not have to worry about buying that invoice back. However, if the carriers invoice just doesn’t pay or pays short the full amount, then the invoice or amount is recourse back to their client. Non-recourse factors may also require stringent background checks and calls to the carrier’s customers seeking financial information which may cause some friction between the carrier and their customer. This not only causes an urgency issue, but it’s possible the factoring company may not purchase invoices due to mild or severe creditworthiness or extended payment terms. This underwriting process restrains the main benefit of factorings, cash flow! Non-recourse fees tend to be higher; factor contracts can be stricter because they are taking on more perceived risk which does take away the flexibility the client may have within the factoring agreement. Non-recourse contract can be difficult to understand due to the stipulations surrounding what is considered “limited recourse” for each invoice.
Ryan Noonan, president of CARRIERNET says that if a deal seems too good to be true, it probably is — because of additional fees, stipulations, and the misconception of Non-Recourse funding built into the agreements.
“Carriers may not have time to comb through the contract and once they do find predatory clauses, the relationship may be in peril and unrepairable. ,” he says. “You can’t just sell your receivables and expect to wash your hands of it.” “There are times when a debt goes unpaid. Before that happens, it’s crucial that the carrier understand what will happen if a debt isn’t paid.”
CarrierNet prefers recourse over non-recourse factoring.
“Recourse factoring provides additional flexibility on who you can do business with and usually comes at a lower cost to the transport carrier due to the risk being passed on to them. This also puts extra pressure on the factor to collect the payment to retain the good client’s relationship.” He adds, “If done right through credit checking and risk mitigated tools provided by a good factor, a carrier should be limited to buying back a receivable anyway.” “Find a factor that puts the pressure on themselves to get receivables collected for you.” He concludes, “Get the all-inclusive deal that gives you additional services for a flat fee. A client should never feel like they are getting nickel & dimed for services provided by a factor”
There are numerous factoring companies available, all with their own stipulations, and expectations. For any carrier interested in exploring these types of financial services, it’s important to understand exactly how the factoring company operates and to read and clearly understand their agreements before signing on.