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Recourse vs. Non-Recourse Freight Factoring

Freight factoring allows you to get paid as quickly as possible for the work you do. Deliver items for your client, submit the bill of lading to your freight factoring company, and get paid that same day or within a couple of days. That’s the benefit you gain with a freight factoring agreement, but the factor takes a lot of risk. That’s why there are recourse and non-recourse agreements.

When you have to decide the best freight factoring arrangement for your company’s needs, you have to consider the factoring fees and whether you have a recourse or non-recourse agreement. Learn the pros and cons of each one and how to pick between them.

Understand the Basics of Freight Factoring

Freight factoring is a service where you sell your unpaid invoices to a company that specializes in invoice factoring. You take a job delivering freight for a broker or shipper. After picking up and delivering the load, you have the bill of lading as proof the job is complete. You’d usually use that to bill the client for the delivery you completed and then wait for the payment to arrive.

With freight factoring, you enter into an agreement with a freight factoring company where they pay you the money that’s due from your client either the same day or within a couple of days. In exchange for the much faster payment, you pay a small fee for the service. If you’re owed $20,000 and usually have to wait six weeks to get the payment from your client, you could have the money minus the fee on the same day you submit the bill of lading. It’s a great way to keep cash flowing in.

This is important as the money you get as an advance may never be paid by the client. That’s where the recourse and non-recourse agreements come in.

What Is a Recourse Freight Factoring Agreement?

Recourse freight factoring agreements mean you have to pay back money that’s advanced to you if your client doesn’t pay. If you’re advanced $20,000 and your client fails to pay the invoice by the absolute deadline, you have to repay that money. It can be a hefty amount to have to pay if you’re already struggling to keep a steady business cash flow.

Pros and Cons:

  • A recourse factoring agreement has the lowest factoring fees.
  • It’s easier to qualify for factoring because you take on the risk.
  • Repayment can be challenging if you’re on a tight budget.
  • You need to be extremely careful about taking on new clients.
  • You’ll need to chase down the payment to get the money you’re owed or take your client to court.
  • If you can’t pay, you could lose your assets until the debt is covered.

Recourse arrangements are low-risk for the factoring company, but that doesn’t mean they’re completely risk-free. That does lead to lower fees, but the factor still has some risk and has to charge fees that take that risk into account.

What Is a Non-Recourse Freight Factoring Agreement?

A non-recourse freight factoring arrangement is the opposite of the recourse arrangement. You deliver a load on time and send your bill of lading to the factor for immediate payment. You get the money you’re owed minus the fee. At that point, your work is done. The money is yours for good. If your client doesn’t pay, it’s not your problem. The freight factoring company has to chase the payment and potentially take your client to court or start debt collection procedures.

Pros and Cons:

  • Non-recourse factoring has higher fees because you’re not taking on any risk.
  • You don’t have to worry about chasing payments.
  • You won’t worry about losing your assets due to a lack of available funds for repayment.
  • It’s harder to qualify for this type of arrangement as you’re not shouldering any of the risk.

Some issues aren’t protected by a non-recourse arrangement, such as breach of contract, invoice disputes, and clients that you invoice directly rather than send through your freight factoring company. Make sure you read the contract. If you deliver a load and damage something in transit, your client may balk at paying the invoice. You’re not going to be protected in that case.

What About a Hybrid Arrangement?

Don’t rule out a hybrid of the two. Hybrid factoring models are a mix of recourse and non-recourse, where you and the factor share responsibility if the client fails to pay.

Suppose your client has an invoice for $20,000 that hasn’t been paid. You might be responsible for repaying $10,000 of the amount you were advanced, and the freight factoring company covers the rest.

This is beneficial as it’s going to be more cost-effective when it comes to the fees you pay. But, it also puts some of the responsibility on your shoulders, so you have to be okay with that.

Pros and Cons:

  • Mid-range fees make it easier to afford without having to take on the full risk.
  • Not as hard to get approved for as you’re splitting the risk.
  • Lowers the amount you’d have to repay if your client doesn’t pay the invoice.

Both you and the factoring company would have to enter into collections to get the money from the client.

Which Is Best?

Which is the best arrangement for your needs? It comes down to what you’re willing to pay in fees and what risk you can afford to take on. Are you more willing to pay higher fees and have the comfort of knowing you don’t have to worry about non-payment? Or, are you willing to repay what you were advanced and do your due diligence to ensure the client is going to pay?

A new trucking company may find that non-recourse factoring is best. When the savings accounts and cash flow are minimal, you may not have the financial resources to work with a recourse or hybrid arrangement. 

Before you make any decisions, ask yourself if the broker or shipper has a good credit rating. If you’re unsure, run a free business credit check and look for red flags. If the client has a history of paying late, the higher fees of a non-recourse agreement are a better choice.

Ideally, run credit checks on brokers and shippers before you agree to a job. If they are high risk, save yourself a headache and say no thanks. Find someone with a better credit rating. With find load apps making it easy to look for more work, you don’t have to face a lot of risk with clients who fail to meet their obligations.

Saint John Capital specializes in non-recourse and recourse agreements, and we also help you by offering free business credit checks. Learn more about freight factoring and the fees related to these arrangements by talking to the specialists at Saint John Capital.

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