Factoring comes with options. There’s recourse, which means you’re repaying a cash advance if your client doesn’t pay an invoice. Non-recourse takes some of the pressure off by covering you in certain situations, such as a broker or shipper’s bankruptcy. Some companies offer a combination option where you get a mix of recourse and non-recourse.
Despite having these options, there are several myths surrounding non-recourse factoring that exist. Here are the myths you may have heard and what the reality is.
Non-Recourse Factoring Is for Financially Insolvent Trucking Companies
Some people think that non-recourse factoring is only for trucking companies on the edge of bankruptcy. That’s not the case, as it can be a smart decision to lower the risk you take. Think of it as insurance against the unexpected.
By the end of October 2023, Freight Caviar reported that about 4 out of 10 brokers that were solvent at the end of 2022 had left the market. Surge Transportation is an example of that. In 2022, the company generated $150 million in revenues, but when it filed for bankruptcy in 2023, it owed $12 million to thousands of companies. Things can turn around that quickly, and you shouldn’t pay for someone else’s problems when you’ve done your part.
A smart business owner takes steps to protect their business; non-recourse factoring is that smart decision. You can do as much as you can to check the credit rating of a new client. There are no guarantees that they will not become insolvent. That’s why non-recourse factoring is a smart move. You’re buffered from another company’s financial problems.
You’re Covered No Matter What
Non-recourse factoring does help out in several situations. If you damage a load because of carelessness and upset your client, non-recourse factoring isn’t going to cover that. It does protect you from your client’s unexpected bankruptcy or closure. If you deliver a load for a broker and a week later, that broker shuts down, you’re protected. But there will be rules that vary from one factoring company to another.
Typically, the factoring company is only going to cover any loss that happens within a few months of you delivering the load appearing on that invoice. You face factoring time frames, which protects the factoring company from having to cover payments where the broker or shipper is unhappy with your service, which is out of the factoring company’s control. That’s why you need to read and understand the terms and conditions listed in a contract carefully.
You Don’t Have to Sign a Contract
Do you think you’ll be able to get a non-recourse arrangement without a contract? It’s unlikely. A contract protects both parties in this type of financial arrangement. You will need to sign one, and that’s important for both your protection and the factoring company’s protection. A contract lays everything out, including fees, expectations from both parties and the rules for the invoices you factor through the company.
However, you do need to be careful when signing a contract. You cannot just sign a contract without reading it or understanding what you’re promising to do. You don’t want a long-term contract that has terms that you can never meet. If you have a contract stating you have to factor 25 invoices per month and you don’t haul that much, you risk breaching the contract and putting yourself at risk of penalties. If you’re locked into a contract that isn’t realistic for your business, it’s going to do more harm than good.
Your Customers Are Going to Be Upset
This is one of the biggest myths. Trucking company owners worry that their existing customers will become upset by the lack of trust or worry that the trucking company is in financial trouble. Many brokers and shippers aren’t upset at all and understand. It’s the sign of a business owner who is less likely to take risks and put the company in jeopardy.
Non-Recourse Factoring Is Too Expensive to Bother With
Recourse factoring does have lower fees, but what happens if a customer fails to pay an invoice? You’re obligated to repay the money you were advanced. However, where does the money you must repay come from? If you have healthy bank accounts, it might not be as harsh as if you’re still building your business and barely making it through a month.
Paying anything late or missing payments affects your credit rating. The late fees on bills you can’t pay on time, credit card interest, and higher interest rates because of a poor credit history eat into your profits. Often, those fees cost more than the fees of a non-recourse factoring arrangement.
However, you do need to pay attention to the fee schedule. Are you being charged extra for transfers, account setup, credit checks, and administrative work? Do you get volume discounts if you have more trucks in your fleet than someone else? Do you have to pay a fee for terminating a contract early? The factoring fee isn’t the only one to consider.
All Non-Recourse Factoring Arrangements Are the Same
Every company has its own rules and policies for non-recourse factoring. You might find one that is closer to your needs. It’s important to compare rates, rules, and contractual obligations.
If a company suddenly sells without filing bankruptcy, you might find yourself responsible for repayment with Company A, which has lower rates, and not Company B, which has higher rates for a reason. You need to compare the different requirements and terms before deciding the best company for your needs.
It’s Impossible to Qualify for This Form of Factoring
No, it’s not impossible. Non-recourse factoring does put more risk on the factoring company’s shoulders, but higher rates and business credit checks help determine risk. If a company has a long history of failing to pay bills, it’s unlikely you’d get a factoring arrangement at all. Plus, who wants to drive for a company with a reputation for not paying for the work they ask drivers to complete?
The fees for non-recourse factoring are higher, but that’s why non-recourse factoring is available to most trucking companies. It’s not impossible to qualify. It’s a service for small trucking companies who need help to get started, not just large established ones.
Saint John Capital has decades of experience in freight factoring and helping trucking companies grow. Our non-recourse agreements are competitive and designed to help you better manage your weekly cash flow. With so many brokers and shippers closing their doors for good, don’t risk your finances to other’s mistakes. Talk to us about our non-recourse arrangements.