There are many benefits to factoring your invoices, but the most important one is that it helps you increase your cash flow for things like payroll, operating expenses, taking on new business, and more. The factoring company will also provide a back-office service such as managing the collection of your invoices that have been factored. But what happens if a customer’s client (called a debtor) does not pay one of those invoices? That will depend on the type of factoring agreement you have with the factoring company. Here we will do a recourse vs non-recourse factoring comparison and look at what they mean to you. You can learn more about freight factoring, by taking a look at this answer-all guide to freight factoring.
In today’s current trucking factoring environment, you have two choices when factoring your freight bills: recourse or non-recourse. Recourse factoring, the most available type of factoring, is the carrier’s outright sale and assignment to the factor of their right to payment for a freight invoice. More commonly, recourse freight factoring is known as invoicing at a discount.
You must understand, however, should the freight invoice amount not be paid to the trucking freight factor for any reason by some predetermined date, you must reimburse the factor 100% of the advance you received, PLUS their fees. The discount rate charged by a recourse freight factor is generally never fixed; it is always variable, and increases based on the factor’s advance date to the carrier and ending with the eventual collection date of the invoice.
Non-recourse factoring is the carrier’s sale and assignment to the trucking factor of their rights to payment, or invoice, to the factor. Should the company whose invoice you received payment for fail to pay the invoice, the factoring company absorbs the full loss and you, the carrier, have no further obligation to the factor.
All non-recourse factors charge a flat discount fee. They will typically advance 100% of the amount due to the carrier, less the discount fee. This type of factoring is plain and simple, with the carrier gaining the maximum amount of cash upon the sale of the invoice to the factor. It also fixes the discount fee, however, the factor could charge other ancillary fees as well. The bonus with this is that once you have factored this invoice, you never have to worry about it again and the client’s issues are no longer your concern. That being said…
No trucking factoring company will take on performance risk of any kind; those incidences are always recoursed back to the carrier. Examples of carrier performance risk are failing to abide by any broker or shipper/carrier contract provision. These contract provisions especially extend to the rate confirmation and the requirements for delivery. Any damage, shortage, and expected condition of the freight upon delivery to the consignee. However, the most important detail, and often the most missed, is the Bill of Lading evidencing the carrier as the rightful delivering party. To the factoring company, this is important: has the carrier properly documented their completion of the service so an enforceable obligation between the factor and the broker or shipper legally does exist? If the carrier fails to satisfy this requirement, the non-recourse factor’s credit guarantee becomes invalid.
Let’s look at a typical recourse freight factoring company program. Most factors will advance the carrier in most cases 90%. You get to use this money for 60, 75, or up to 90 days, and then if not paid, you must buy the invoice back or substitute a new one for the same amount. And of course, now you have a very delinquent invoice to collect. The typical recourse freight factoring company charges you an initial factoring discount ranging from .5% to 4% depending on the anticipated monthly volume of the carrier to the factor. The factoring fee usually covers the first 30 days the invoice is outstanding from the time you received the money.
Now, it gets interesting. On day 31, most factors charge an additional factoring fee or discount for another period(s) of time until collection. It generally will be a lesser fee, but it still adds more fees until the invoice is collected or closed. Some examples are added fees (or discounts) every 7, 10, 15, or 30 days (or even daily) until the invoice is finally collected. Again, the fee clock never stops until the invoice is paid by the account debtor or at the date you repurchase it. If you go over the repurchase period, even more fees could be added.
Most freight factoring company contracts state that if you can’t repay the obligation when due you’re in default, and more fees can be assessed. It’s very possible the largest part of the 10% you were not advanced ends up being the factors fees. There are of course other types of fees the trucking factor can charge just for the privilege of having access to working capital, but that’s a whole other topic.
As we begin to compare the two factoring choices, let’s begin with the biggest question any trucking company needs to know should any broker or shipper fail to pay the invoice on the load just completed or sometime during the resource provision of the contract.
To keep the math simple, let’s say the typical net profit is 15% on every load you deliver. You then must divide the net profit percentage into the amount of the load that fails to pay for a financial hardship of the broker or shipper. Example: A broker fails to pay you on a $1,500 load. The calculation to determine the amount of sales volume needed to replace the incurred loss is: 15% / $1,500 = $10,000. For the owner-operator, this amount could constitute one month’s entire revenue.
What does the recourse factor give you in return for selling them this right to payment or invoice? Yes, you get 90% of the amount still due you until the payment is received one way or the other. The quicker the invoice pays, the quicker the reserve is released to you. Freight factoring companies will generally provide you credit approvals or guidance, as the eventual collectability really falls on the carrier, routine collection calls on the invoices they purchase, and the postage and mailing of your invoices.
How do you know you’re getting a good deal or not? One thing is certain, that you don’t know the final factoring fees until collection. Most factors collect their freight bills in 36-39 days so the initial factoring fees will not be enough to cover most factored accounts. They control the mailing of the invoice so if they are late in mailing them, guess who pays for their sloppy process with more freight factoring fees? If you are looking in a mirror, you have the right answer!
Since the factoring fees increase daily until the invoice pays, and the trucking factor is responsible for collections, where’s the motivation to make those scheduled calls to collect them faster? The reality is that you must get involved to help collect the invoices to ensure more prompt payment is made to the factor. Now how much does that (work the factor should be doing) cost you, the trucking company, or owner operator? Again, if the invoice is not paid by the time the recourse period ends, it will be up to you to collect the entire amount, as the factor has completed its obligation.
Adding insult to injury, the freight factoring company’s notice of assignment is still in place, so the money you now are going to the effort to collect will most likely be sent to the factor, and further delay your receipt of the very funds that you paid a hefty price to get an advance on!
A true non-recourse freight factoring company gives you all the money less their flat rate factoring fees. The non-recourse factor typical fees range between 3% and 6% depending on expected monthly volume. They always provide credit information and approvals, mail your invoices, and collect them. Once they advance you the money, it’s their problem should the broker or shipper whom they’re billing fail to pay for financial reasons. Because their rates are fixed and they paid interest each day to their lender, they’re truly motivated to collect the invoices faster and efficiently to avoid credit losses and continued profitability.
A note of caution: non-recourse factors take financial risk only, not any type of performance risk. If the paperwork, the Bill of Lading doesn’t prove enforceable, an obligation to the delivering carrier (factoring client) exists, or if the load failed to meet any provision under the carrier/shipper/broker contract and/or rate agreement, then all bets are off.
After looking at the realities of recourse versus non-recourse factoring in today’s economic environment, and then after realizing the revenue needed to recover just one unpaid load costs the company regardless of size, how could recourse factoring really benefit any small trucking company during any economic times? Which type of factoring has the greatest incentive to operate an efficient and effective collection company, in addition to advancing cash to freight carriers? Which factor shares your risk, ultimately becoming a partner with your firm in helping you take on new business, without having to wait for the collection of the old? That answer should go a long way in helping you choose between the competing factoring methods.
Take a look at this article and see reasons to factor with us, many truck drivers and trucking companies have trusted us over the years to handle their invoice factoring because we are the only 4.9 stars Google-rated freight factoring company Pay4Freight Google review.
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