Why Choose Recourse Factoring vs Non-Recourse

Why Choose Recourse Factoring vs Non-Recourse

Accutrac Capital 01-Feb-2017 0 Comments

Once a freight carrier decides to use invoice factoring to gain control of its cash flow, it then becomes a question of whether to use Recourse or Non-Recourse factoring. Non-Recourse factoring, at first glance, appears to offer an attractive benefit; the apparent absence of monetary liability to the carrier once the invoice has been factored. Researching this subject, I have discovered that the terms and conditions that govern a Non-Recourse agreement in effect negates real value to the carrier.

The Reality of Non-Recourse Factoring

Perhaps the most misunderstood form of invoice factoring is Non-Recourse. It is commonly believed that a Non-Recourse agreement safe guards the carrier against financial loss if a customer fails to pay their freight bill for any reason. In reality, this is not correct! It is clearly stated in the actual terms of a Non-Recourse factoring agreement that the protection against financial loss is valid in one circumstance only; the failure of payment by reason of insolvency. If the customer fails to pay the invoice for any other reason, the carrier is obligated to repay the advanced funds back to the factoring company plus additional costs.

Understand the Terms before you sign

It is imperative to understand the full extent of the terms governing a Non-Recourse agreement before you sign a contract. This unfortunately is not an easy task; Non-Recourse factoring agreements often do not contain the full terms of the contract. Instead, the contract references an additional set of terms that exist in an online document. It is left up to the carrier to navigate to this document, read it and understand its implications before signing the agreement.

A publicly posted website, containing the terms and conditions that apply to a Non-Recourse factoring agreement, includes the following definition:

___Non-Recourse Credit Guarantee means the assumption by Purchaser (the factoring company) of the risk of non-payment on certain Purchased Accounts identified by Purchaser, so long as the cause of non-payment is solely due to an Account Debtor (the carriers customer) becoming Insolvent.

According to the meaning spelled out in this definition, the only financial protection a carrier receives against non-payment is if the carriers customer becomes insolvent. If the invoice is not paid for any other reason, such as a service dispute, poor quality documentation, or any number of other issues, the carrier is liable and must repay the factoring company. This creates a dangerous set of conditions that potentially could have serious negative implications on the carriers finances. This becomes the point of reckoning for most carriers caught in this situation. Suddenly, and out of the blue, they are responsible to repay the invoice amount plus additional fees to the factoring company. At this point in time, the carrier suddenly realizes that Non-Recourse factoring works against their financial best interest. The higher cost of Non-Recourse and the minimal protection it provides is comparable to paying a higher premium for an insurance policy that offers little protection.

The Preferred Choice is Recourse Factoring

The most commonly used form of invoice factoring is Recourse Factoring. It is by far the most cost effective and beneficial option compared to Non-Recourse.; According to the terms of a Recourse factoring agreement, if for any reason a customer fails to pay an invoice within the recourse period (usually 60 90 days), the carrier must repay the advanced funds to the factoring company. Although this appears to be less advantageous to the carrier, Recourse factoring is the preferred choice:

  • Recourse Factoring costs less: Factoring fees for Recourse Factoring are typically 1% cheaper than Non-Recourse because the credit risk resides with the carrier.

  • Repayments to the Factoring Company are few: Careful credit checks by the factoring company helps to identify and avoid hauling for poor credit worthy customers. This meticulous work practice contributes significantly to reducing the incidence of unpaid invoices to few and far between.

  • High Success Rate on Freight Bill Collections: The trained professional staff of a reputable factoring company has extensive experience in courteously pursuing collections. Freight factoring companies boast a high success rate on freight bill collections.
     
  • Fewer Credit Restrictions: Recourse factoring provides fewer credit restrictions than Non-Recourse allowing the carrier to haul for a larger pool of customers.

Why Pay More to get Less?

Weighing the options is a simple matter. Factoring fees for Non-Recourse are higher than Recourse, while the incidence of a customer failing to pay due to insolvency is statistically low. With this in mind, what would possibly motivate you to pay a higher cost on every invoice you factor? Ask yourself this question; how many times have you had an unpaid invoice due to a customer going bankrupt? For most carriers, the answer is probably VERY FEW. Then consider; does the rate of incidence justify paying an additional 1% on every invoice you process? Armed with all the facts and considered carefully, Recourse Factoring is most certainly the better choice.

How to Choose a Freight Factoring Company

Freight transportation is a capital intense industry demanding constant access to working capital to sustain operations. Your capacity to effectively manage regular and reliable cash flow will have a substantial impact on the success of your trucking company. With the extreme difficulty trucking companies face in acquiring a commercial operating line-of-credit, Invoice factoring is emerging as a mainstream financial strategy.

When choosing the best invoice factoring solution to meet your needs, it is vitally important to choose the right factoring company. The rule of thumb is simple; freight carriers should choose a freight factoring company that provides specialized services for trucking companies.

Accutrac Capital is a factoring company exclusive to the trucking industry. Our factoring rates are the lowest in the industry, with high advance rates and same day funding. Our recourse period is 90 days, providing maximum time to identify late paying customers and proactively pursue collections. Accutrac Capital further benefits the industry we serve by providing a FREE online Credit Search tool to help protect carriers from bad debt.

For more information about freight factoring and cost saving services for the trucking industry, visit us at: www.AccutracCapital.com or call 866-531-2615


 

Comments

Comment Form

Was this helpful? ... No Very
Slide this bar to the right to enable submitting

Blog Categories

Freight Factoring & Discount Fuel Cards for Trucking Industry
Questions? Contact Us!

Freight Factoring | Fuel Cards | Cash Advance B4 Delivery
Services for the Trucking Industry

I would like to receive your newsletter