As a new carrier just getting started or an established carrier looking to grow your business, you’ve probably researched factoring, and may have come across the terms recourse and non-recourse factoring. Before you make decisions on factoring companies, it’s important to understand the differences between these two factoring types.
We visited with Talley Clower, managing member of Provident Commercial Finance, to get his insight on recourse vs non-recourse factoring and their differences. He said the goal at Provident Commercial Finance is to help clients find the best option to grow their business and protect their biggest asset – cash flow.
What is Factoring?
Question: Before we get into the details of recourse vs non-recourse factoring, can you take a step back and just give us a little refresher on what factoring is and how it helps carriers?
Clower: Factoring gets companies paid when they need it the most, so they aren’t waiting on unpaid invoices at the risk of paying their own bills. You sell your invoices to a factor at a discount in return for immediate cash availability. Partnering with a factoring company can help keep trucks on the road and allow for additional business growth.
Question: What would the general factoring process look like for someone working with Provident?
Clower: We work to keep it simple so that the process of factoring and getting paid doesn’t interfere with your real business. Basically:
- Deliver your scheduled load
- Submit your invoice/paperwork to Provident through its 24/7 portal
- If the paperwork is in order, you get paid same day or next day (your choice) rather than 30, 60 or 90 days later.
Recourse versus non-recourse factoring
Question: What is recourse factoring?
Clower: Recourse factoring means that if the factor doesn’t get paid, they can go back to their client, the carrier, and have them purchase the invoice back.
Recourse factoring is the most common form of invoice factoring. With this plan it puts the ultimate responsibility on the carrier for solving any nonpayment issues on the invoices. Regardless of whether the entity that is not paying the invoice went out of business, went bankrupt, or there was a dispute or claim filed, it would be the carrier’s responsibility to settle the unpaid invoice. This is done by paying the advanced amount back to the factor plus any associated fees.
Now, this may sound like too big of a risk for your company, but there is a reason this is the most common form of factoring.
Question: What is non-recourse factoring?
Clower: Non-recourse factoring means the factor buys the invoice and will assume all the risk and liability for that invoice. If a carrier’s client does not pay the invoice, the factor is the one which assumes the risk for non-payment. And, yeah, that sounds like a good plan. You get paid and “never” have to worry about that invoice again.
But that can be misleading and oftentimes, confusing.
In truth, the carrier is still potentially liable for those invoices unless the broker declares bankruptcy or insolvency in a court. In fact, within most non-recourse contracts, there is almost always the clause that says that if the factor feels it’s at risk for not receiving payment, they can go ahead and charge that invoice back to the carrier.
Question: That doesn’t sound much different than the recourse factoring. Is it?
Clower: Good question and you’re right.
Non-recourse factoring may sound like a good plan to get payment from people who don’t have good credit. And the factor isn’t going to buy invoices for brokers that are a bad credit risk in the first place (neither do recourse factors for that matter). So non-recourse factoring doesn’t give the carrier carte blanche to haul for any and every broker out there. It will actually restrict the number of brokers you can haul for since the credit requirements are typically higher.
And ultimately it ends up with the same outcome as non-payment in recourse factoring, because if the factor feels that a debtor is headed for bankruptcy, they can charge the invoice back anyway.
Question: So, what’s the downside of non-recourse factoring, if there’s the potential to not have to worry about nonpaid invoices, even if some of them may end up back in the hands of the carrier?
Clower: If you choose non-recourse, you’ll usually pay a higher rate, or an additional percentage of the invoice, and will still be liable if the broker doesn’t pay, except in the case of bankruptcy or insolvency. The ultimate downside is when you think you no longer have any liability for non-payment of invoices only to find out that you do.
Question: In non-recourse or recourse factoring, what can a carrier do to protect themselves from running into dealing with invoices that never get paid?
Clower: The first thing you do is listen to your factor! Never, ever haul a load – never, ever pick up a load for a broker that your factor has not pre-qualified as creditworthy! The worst feeling in the world is when a client submits a new broker to their factor after they hauled the load, only to find out the factor won’t buy the invoice because of the credit risk. Always ask your factor first! This is true of both recourse and non-recourse plans.
Because any non-payment puts a strain on our clients, at Provident Commercial Finance, we run credit checks on companies before you ever haul the first load for them, because we have our clients’ best interests in mind.
We assign each of our clients a dedicated senior client advisor, and they work to develop a long-term relationship with each of our carriers. They will be your advocate and let you know if the company is in good standing or if there is credit availability.
Key differences in recourse and non-recourse factoring
Question: Specifically, what are the differences a carrier will see between recourse and non-recourse factoring?
Clower: Liability, cost and requirements.
Question: Ok break it down. How is the liability different between the two?
Clower: If there are unpaid invoices at the end of the recourse period, under recourse factoring, the unpaid invoice is returned back to the trucking company to resolve. The cash that was advanced on the invoice plus any associated fees are repaid to the factor. The trucking company is solely responsible for the collection or resolution of the outstanding invoice.
Under non-recourse plans, liability remains with the factor if the invoice goes unpaid, but only under certain situations. The acceptance of the unpaid invoice liability is all dependent on the terms of the signed agreement between your company and the factor. For example, the factor may only accept the liability if the debtor becomes bankrupt/insolvent. Depending on the factoring company you choose and the agreement in your contract, the level of liability can vary.
Question: And what about with cost? What can a carrier expect between the two options?
Clower: Resource factoring generally costs less than non-recourse factoring for the carrier. The factoring company can offer lower rates due to having a lower nonpayment risk.
Opposite of that, non-recourse plans tend to have higher rates/prices. Due to the factor now assuming more of the nonpayment risk, they charge more to compensate for this added risk. Though it has a higher cost this plan can potentially add more security to companies and protect their cash flow from unforeseen payment issues.
Question: What did you mean in regards to varying requirements between non-recourse and recourse factoring?
Clower: When it comes to the terms and conditions of each plan and the requirements to qualify, recourse factor plans tend to have less stringent requirements. This is, of course, because the factor shares the risk of nonpayment with its clients.
Due to the nature of non-recourse plans, there can be additional requirements and applications that must be met before invoices can be accepted for payment.
Question: Can you summarize what all this means if someone were to choose to do business with Provident – will you help carriers determine if recourse or non-recourse is the best plan for them?
Clower: Bottom Line…
Provident Commercial Finance is a recourse factoring company. That said, our client advisors are well trained on the differences between the two and have our clients’ best interests at heart. Have you ever seen Miracle on 34th Street where Macy’s doesn’t have a toy a mother wants for her child? Santa sends her to another store altogether because that’s what was best for his “client”. Just look at Provident as Santa who wants the best for the children and if we don’t have what you need, we’ll tell you and send you somewhere where you can get what you want.