Freight bill factoring is nothing new. However, while many in the trucking industry know that factoring is designed to turn receivables into cash instead of waiting on clients to make payments on their invoices, the methods differ greatly between recourse and non-recourse factoring.
In broad terms, the choice between recourse and non-recourse factoring hinges on three very important points:
1. If an invoice is submitted for factoring and the client does pay, what happens?
2. Is the client or the trucking company responsible for the non-payment?
3. What steps are taken if clients do not or cannot pay their invoices?
Before signing up with a freight bill factoring company, it is important to understand how both recourse and non-recourse factoring methods work.
Recourse Factoring for Trucking Companies
Like any other factoring company, recourse factors provide cash in exchange for unpaid receivables. The percentage they take for processing fees is generally lower, but the reason for this is that trucking companies who use recourse factoring assume most of the risk. For example, if an owner-operator or trucking company has a number of invoices, and they want to get fast access to revenue from those receivables, they might choose to utilize recourse factoring. The invoices are submitted and funds are made available. If the clients do not pay, are late with payments, or cannot pay due to bankruptcy or financial hardship, then the responsibility falls on the owner-operators and trucking companies that use recourse factoring. Trucking companies that use recourse factoring are responsible for buying back any invoices that are not paid by clients. This can result in trucking companies and owner-operators taking a big loss and enduring a big strain on cash flow as they try to get payments. Even performing collections can add up to 45 days from the time the collections start, so some invoices could take months before they are paid.
Non-Recourse Factoring for Trucking Companies
As with recourse factoring, non-recourse freight bill factoring works under the sample methods of converting receivables into cash without placing any debt on the balance sheet. The big difference is that with non-recourse factoring, the factoring company assumes the risk. This means that if clients are unable to pay their invoices due to bankruptcy, the trucking companies and owner-operators still retain their cash without having to buy back the unpaid receivables. Trucking companies and owner-operators are still responsible for payments in case of default, but if the client’s customers file for Chapter 11, the factor will assume full liability in the case of true non-recourse. In order to assume this risk, non-recourse factoring companies typically charge slightly higher fees, however, this also allows them to provide a faster turnaround on invoices than their recourse counterparts. Additionally, non-recourse freight bill factoring companies can allow trucking companies and owner-operators to choose which invoices they want to submit.
Factoring and the Current Trucking Landscape
The trucking industry is much more diversified than it was a decade or even a few years ago. Choosing between recourse and non-recourse factoring is a big decision for both trucking companies and owner-operators. Given that recourse factoring places all risk on the trucking companies, it might make sense to use this type of factoring if you have long-term contracts with clients that have a steady track record of paying their invoices on time. For smaller trucking companies, and owner-operators that focus on spot loads and the like, non-recourse eliminates any risk and ensures fast access to revenue.
Risk Vs. Cash Flow
Ultimately, the choice between recourse and non-recourse comes down to risk and cash flow. If trucking companies and owner-operators are fine with assuming most of the risk and the potential consequences of having to buy back unpaid invoices, then recourse factoring may seem like a good option. However, if they are more comfortable with eliminating any risks, getting a faster turnaround on invoices, more flexibility, and immediate access to revenue in order to boost cash flow, then non-recourse may be the way to go.
Single Point Capital is a national leader in freight bill factoring services. We offer non-recourse factoring and make funds available to your account in a single day. Trucking companies and owner-operators that use our services can choose which invoices they factor, and we offer a whole suite of tools to track payments, manage your account, and much more. Signing up with us also gives you access to fuel discounts, insurance programs, and everything you need to keep your operations moving. Contact Single Point Capital today to get started.