What is the Difference between Recourse and Non-Recourse Factoring?
In the trucking industry, cash flow is the lifeline that keeps your operations running smoothly. Freight factoring is a common solution for trucking companies to improve cash flow by selling their invoices to a factoring company. However, when exploring factoring options, you may come across two terms that can significantly impact your decision: recourse factoring and non-recourse factoring.
Understanding the difference between these two types of factoring is essential to choosing the right solution for your business. Let’s break it down.
What is Recourse Factoring?
Recourse factoring is the more common and cost-effective option. In this type of arrangement, the factoring company advances you a percentage of your invoice amount (typically 80-95%) upfront. Once your customer pays the invoice, you receive the remaining balance, minus the factoring fee.
However, if your customer fails to pay the invoice, you remain responsible for repaying the factoring company. Essentially, the risk of non-payment falls back on you.
Why choose recourse factoring?
Lower fees: Since the factoring company is not taking on the risk of non-payment, recourse factoring often comes with lower rates.
Flexible terms: For businesses with reliable customers, recourse factoring can be a cost-effective way to improve cash flow.
What is Non-Recourse Factoring?
Non-recourse factoring shifts the risk of non-payment from you to the factoring company. If your customer fails to pay due to insolvency or bankruptcy (specific conditions outlined in the contract), the factoring company absorbs the loss.
This option provides peace of mind, especially if you’re working with new or less predictable clients. However, non-recourse factoring typically comes with higher fees to account for the increased risk.
Why choose non-recourse factoring
Risk protection: You are protected from bad debt caused by customer non-payment under qualifying circumstances.
Financial stability: Non-recourse factoring can safeguard your business against unexpected financial disruptions.
Key Considerations When Choosing Between Recourse and Non-Recourse Factoring
Customer Reliability: If your customers have a strong payment history and creditworthiness, recourse factoring may be a more economical choice. For less predictable clients, non-recourse factoring offers added security.
Cost: Non-recourse factoring typically costs more due to the added risk the factoring company takes on. Evaluate whether the additional expense aligns with your business needs.
Contract Terms: Always review the fine print. Non-recourse factoring agreements often cover specific scenarios, such as customer bankruptcy, but may exclude other reasons for non-payment.
How Single Point Capital Can Help
Whether you’re considering recourse or non-recourse factoring, choosing the right partner is crucial. At Single Point Capital, we offer customizable freight factoring solutions designed to meet the unique needs of trucking businesses.
Our team helps you evaluate your options, so you can choose the factoring type that aligns with your cash flow needs and risk tolerance. Plus, we provide additional services like same-day funding, fuel advances, and dedicated account representatives to support your business.
Understanding the differences between recourse and non-recourse factoring empowers you to make the best decision for your trucking company. With Single Point Capital, it is important to us that you have a partner that is dedicated to helping your business thrive—no matter which factoring, solution you choose.