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Non-Recourse Factoring and Credit Protection: Safeguarding Against Bad Debt

The economy depends on the sale of goods, and it’s the trucking industry that ensures those goods get to the consumer’s hands. Whether they’re picking up crates and pallets at ports, airports, warehouses, or manufacturing plants, truck drivers are crucial. 

But, no matter how hard a team works, one late payment or unexpected expense can cripple a trucking company. A strong cash flow is essential, and a lot can impact bank balances. Seasonal slowdowns also negatively impact trucking companies. 

Even with the best administrative team tracking payments, managing the books, and drawing in new clients, you’re always one step away from financial ruin. Non-recourse factoring is key to protecting your business’s credit.

How a Strong Cash Flow Protects Your Credit Rating

Your business credit rating is based on how much debt you have, how many companies are still owed money, and how many late payments you’ve made. If you’re paying bills more than 30 days late, have accounts that are in arrears, or defaulted on loans, your credit rating takes a hit.

When you have money coming in right after you complete a job, you have the funds needed to pay wages, insurance, bills, and common expenses like gas/diesel fill-ups, truck maintenance, etc. Keep some of it set aside in an account that covers emergency expenses like a blown tire or other unexpected truck repair. 

Traditionally, trucking company owners take out loans like a business line of credit or get a business credit card to cover emergencies. Interest rates are very high on credit cards, and a business loan’s interest rate is going to be higher than the fee you’d pay with freight factoring. You’re getting paid faster, avoiding high-interest rates, and avoiding unnecessary debt.

Freight factoring arrangements don’t harm your credit rating. It’s not a loan product. You’re simply selling your invoices for what’s essentially a service fee. That also helps you out by keeping you out of debt. 

Freight Factoring’s Role in Protecting Your Credit Rating

Freight factoring involves selling a pending invoice to a company that pays you the money due, minus the fee, and takes over the collection of the money due. It keeps you out of the harmful debt cycle that impacts your credit rating.

You don’t fall prey to the cycle of debt building up, which leads to higher interest rates, which makes it harder to afford your credit card bills or loans. If you start paying late, your credit score declines, which means your interest rates go up more. 

Eventually, you could be denied a loan or have to enter into a bad debt loan, which we feel is predatory because the interest rates are extremely high and draw you deeper into debt. Eventually, it’s hard to qualify for any loan, which hurts when you’re trying to grow your business.

Instead, freight factoring provides a means to getting cash immediately. Here’s how it works.

You sign a contract with a freight factoring company after agreeing to the factoring fee. When you complete a job or pick up a load, depending on the arrangement, you submit the signed bill of lading and get paid. Depending on the time of day, you could get paid the same day or within a day or two depending on bank processing times.

You now have money and don’t have to worry about chasing down payment. It frees up your time, and you have the funds to pay bills, wages, insurance fees, rent, loans, etc. You pay bills early or on time, which protects your credit rating.

You also gain several other advantages:

  • You can focus your energy and time on growing your business through marketing and heightened customer service.
  • You have access to additional services like load-finding apps, load-tracking apps, and fuel discounts.
  • You’re able to pay your suppliers and vendors on time.
  • You’re less stressed.

With a strong cash flow, if you do need to purchase new trucks or want to purchase your warehouse or garage, you have a higher credit score, which increases your ability to negotiate a lower interest rate and better terms.

Understanding Non-Recourse, Mixed, and Recourse Factoring

Freight factoring companies typically provide recourse or non-recourse factoring arrangements. Some offer a hybrid of the two. When you’re looking to protect your credit rating, a non-recourse arrangement is best. Here’s why.

With a recourse factoring arrangement, you’re on the hook for repaying the factoring company if your client fails to pay. Suppose you complete the job as requested, and the client is happy. You work with a factoring company and get paid that day or within a couple of days. You have the money, and everything’s great.

Two weeks later, you’re scanning the news and see that the broker suddenly shut their doors and filed for bankruptcy. The factoring company comes to you demanding repayment. With a recourse agreement, you’re required to repay them. If you’ve already spent that advance, you can’t repay yet, and that’s going to hurt your credit score. You have a payment that’s due and no money to pay it.

Now, imagine if you’d entered a non-recourse agreement. In this case, the broker files for bankruptcy unexpectedly. The freight factoring company has to swallow the loss. It’s not your problem. You’ve been paid, and you don’t shoulder the risk.

Some companies also offer mixed arrangements. If it’s available, you’d be responsible for a certain percentage, and the freight factoring company covers the rest. 

When you enter into a freight factoring arrangement, you will pay a factoring fee. It’s a percentage that typically ranges from 1% to 5%. If you’re owed $10,000 and have a 5% factoring fee, you’d pay the factoring company $500 for the service it provides.

When you have a non-recourse arrangement where the factoring company shoulders the risk, you’ll pay more. If you shoulder the risk, you pay less. You have to decide if it’s better to be financially responsible and pay less of a fee or pay more to have that insurance.

Tips for Finding a Freight Factoring Partner

When you’re looking for a freight factoring partner, there are a few questions you should ask. Use the answers as guidance to partnering with the right factoring company for your needs.

  • Do they factor all invoices or focus solely on the trucking industry?
  • What are the freight factoring fees? What other charges are possible, such as application fees, credit checks, or enrollment fees?
  • Is there a minimum invoice amount or number of invoices that must be factored each month?
  • How many years have they been factoring invoices?
  • Do they offer other services like fuel discounts, same-day payments, job boards, and payment apps?
  • How do you reach customer service? Is the help desk available 24/7?

Freight factoring is a smart financial tool for managing your trucking company’s cash flow and credit rating. However, it’s an arrangement you need to carefully consider and make sure you understand the terms and conditions before you sign the contract. If you’re uncertain of anything, it’s better to ask for clarification.

Saint John Capital is a freight factoring specialist that’s been in business since 1997. We’ve helped thousands of companies grow from having just one or two trucks to national fleets. Let us know how we can help you protect your credit rating and grow your trucking company.


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