Freight Factoring also known as trucking factoring or transportation factoring, turns your invoices into immediate cash and eliminates the wait of getting paid after each load has been sold. Engaged Financial offers both Recourse and Non-Recourse factoring to our clients, and in this article we describe the difference between the two so that you can make the best decisions for your business.
Recourse factoring is when you are responsible for the debt if your customers don’t pay the invoice. Regardless, the factoring company will do its best to collect payment from your customer. However, if your customer does not pay, you assume the nonpayment and must repay the funds owed. A Recourse factoring invoice usually involves lower factoring fees since there is a lower risk for the factoring company.
Non-Recourse factoring is when the factoring company becomes responsible for the nonpayment of approved clean invoices due to bankruptcy or financial inability to pay. With a non-recourse factoring agreement, the factoring company assumes a higher risk because we take responsibility for a broker, shipper, or customer filing bankruptcy or having financial issues. Because of the risk involved with non-recourse factoring for a factoring company, typically a higher factoring fee is involved. There is also typically a more rigorous application process because you’ll need to show that your customers have consistent records of on-time payments.
How to choose the right factoring for your business
There are pros and cons to both Recourse and Non-Recourse Factoring. When trying to figure out which factoring is best for your business, it’s essential to keep in mind the type of customers you work with and the risks involved.
Is Recourse or Non-Recourse Factoring Best For Me?
If you work with some customers that may not have the strongest records of on-time payments then you might prefer Non-Recourse factoring. But if you mostly work with reliable customers then you might prefer Recourse factoring. With Non-Recourse factoring, the factoring company would assume the responsibility for a non-payment based on the reasons above while with Recourse factoring the responsibility for a non-payment will be yours.
The biggest difference between Recourse and Non-Recourse factoring is who will be responsible for non-payment. If non-payments haven’t been an issue for your business then you might want to consider other factors as well. Typically with Recourse factoring, there are lower fees involved and higher advance rates. But you will be responsible for any non-payments if they do occur. If you want the extra security of not being responsible for the financial problems of a broker, shipper, or customer then Non-Recourse factoring is for you. However, typically there might be high factoring fees and lower advance rates.
See how Factoring Works with Engaged Financial
At Engaged Financial, we work closely with our clients to ensure that we find the best factoring type for them and their business. Whether you prefer Recourse or Non-Recourse, we offer both. Not completely sure which type of freight factoring is for you? We’ll help give you all the facts you need to make the best decision.