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What’s the Difference Between Recourse and Non-Recourse Freight Factoring?

One of the best ways to keep a steady flow of money is by hiring a freight factoring company. You don’t have to wait around for your shippers or brokers to pay you. A company will pay you all or part of the money due and chase down the payment for a small fee. You no longer have to send invoices out, keep track of who has or hasn’t paid, and make calls if the expected payments are overdue.

Before choosing a freight factoring company, you need to know the difference between recourse and non-recourse freight factoring. One sounds safer, so it may be more appealing. But, it has higher fees, so you end up paying more to the company that’s factoring your bills of lading. Before you decide, you need to weigh the pros and cons of each.

The Pros and Cons of Non-Recourse Freight Factoring

Even if you do your best to partner with shippers or brokers with excellent records of paying on time, it can be costly if they don’t pay. Not only are you out of that money, but you also are about to spend a lot of time fighting to get the payment. That’s hours of office work that’s best devoted to other tasks. The critical point of non-recourse freight factoring is that it takes the burden off you. If your client fails to pay an invoice, it’s not your problem.

Are there downsides to a non-recourse freight factoring agreement? Yes. The biggest is that you’ll pay higher fees. Of the money that’s due, more of it is lost to fees. The costs are understandable, though, as the factoring company is taking the majority of the risk. The higher fees offset the losses for clients who don’t pay.

How much extra do you have to pay? It varies, but on average, expect to pay 4% or 5% of your invoices. If you have a bill of lading worth $10,000, the fees could go as high as $500, so you’d get $9,500. The good news is that you get $9,500. If the client doesn’t pay, it’s not your problem.

The Pros and Cons of Recourse Freight Factoring

A recourse agreement puts the risk of non-payment on your shoulders. If your client doesn’t pay, you owe the unpaid amount to the freight factoring company. This may not be appealing if you need cash to cover bills like fuel for other loads, repairs, and wages.

Typically, a recourse agreement has fees of up to 3%. You could end up paying no more than $300 on a $10,000 bill of lading. As long as your client pays, you’ve saved money. To ensure you get paid, you want to carefully choose shippers and brokers to make sure you’re not partnering with one that has a reputation for late payments or non-payment.

How Do You Choose?

What kinds of loads do you take? Are you driving for one or two large companies and have substantial invoices? Have you worked with this broker or shipper before? A non-recourse factoring agreement offers plenty of protection if the company, new or established, fails to pay.

Recourse factoring agreements are best when you have customers with a reputation for paying on time. You’ve been hauling loads for a local company for five years, and they always remit on time. You’d probably be fine accepting a recourse agreement. It’s also a safe option if you have smaller bills of lading. If they don’t pay, you don’t want to have to pay back tens of thousands of dollars. Keep the amount of money you have to pay back to a sum you’re comfortable owing.

Before signing any agreement with a factoring company, ask these questions. You want to know what the rates are. That’s the most important discussion to have, but you should also cover these questions.

Do You Offer Other Services?

Ideally, partner with a factoring firm that offers free credit checks. You should also find out if they offer branded debit cards that offer discounts on the fuel your trucks need. If you can get your payments sent right to that debit card, it can eliminate high banking fees and lower your diesel or gasoline costs.

Learn how you request payment for your bills of lading. Do you have to create and mail or fax an invoice, or can you submit scans of the bills of lading on your phone? The best freight factoring firms eliminate the need to prepare an invoice and do that step for you. Ask if you can download the invoices they create to your accounting software. It saves a lot of time and hassle.

Can you look for more work with the freight factoring company? If you can search for work, it’s easy to prevent having drivers returning to your company with an empty truck. Empty trucks waste a lot of money. If your driver left Chicago to deliver something a few states away, it’s wise to look for a delivery that fills the truck for the return to Chicago. You make money both ways.

Take Steps to Get the Most Money

Don’t take a new client before running a credit check. If you’ve never worked with a shipper before, take your time to check their financial history. Make sure they pay on time, and if you see a lot of late payments, turn them down. You can always ask why and decide if the explanation gives you comfort that they’ll pay you on time. Still, it would be best if you considered a non-recourse plan until they’ve proven themselves.

You completed your job, so you want to get paid. Saint John Capital offers free credit checks using real-time information and not databases filled with older information. We help you choose clients who will pay on time, every time.

Plus, our flat fee plan helps you avoid extra fees if your broker or shipper fails to pay the freight factoring firm. We’re here to make sure you’re paid quickly and have a reliable flow of money. Click our “Get Paid” button to get started.

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