Recourse vs. Non-Recourse Freight Factoring

Factoring, whether recourse or non-recourse factoring, is a financial service that allows a freight carrier to sell its invoices to a factoring company for a cost so it can receive payment immediately. The factoring company keeps a percentage of the payment to cover its efforts for providing the funds and for the time spent collecting repayment from shippers or brokers. 

The primary difference between recourse and non-recourse factoring is which party takes on more of the risk in the event the shipper or broker goes out of business.

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What is recourse factoring?

If you’re a freight carrier, recourse factoring means you’re on the hook for any debt if your customers don’t pay. So if you sell your invoice to a factoring company, and they can’t collect the balance from the broker or shipper by a specified day (usually 30-90 days), you have to buy the invoice back from your factoring company. On top of that, you have to spend the time attempting to collect payment from the broker or shipper, but if you’re unable to, then you eat the loss.

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What is non-recourse factoring? 

In non-recourse factoring, if the broker or shipper goes out of business or declares bankruptcy, then the responsibility for collecting payment on an invoice is with the factoring company, not the carrier. However, the factoring company wouldn’t cover payment in instances where the carrier failed to complete the work promised on the rate confirmation. There may be some instances in which the factoring company would assume responsibility for non-payment, but they vary by company and carrier. 

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What’s the difference between factoring with recourse and without?

While trucking companies assume more risk with recourse, non-recourse isn’t necessarily all upside for freight carriers. It frequently comes with higher rates and/or fees, fewer brokers and shippers approved for factoring, and more. An exception to this is Outgo, which offers some of the lowest rates in the industry and non-recourse at no additional cost. You can learn more about what makes Outgo different here.

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Most factoring companies offer both recourse and non-recourse, but they often don’t publish their rates so it’s harder to determine the true costs up front. And even if they do show their rates, there are often additional costs once you dig into the contract’s fine print. You might find additional fees and charges, or lengthy contract timelines, all of which impacts the actual costs. 

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Recourse factoring

Recourse factoring is the most common type of factoring in freight because it’s usually both less expensive and also easier to qualify for. Since it comes with greater risk though, it’s not always ideal for carriers if they have cash flow issues or less certainty in their business operations. 

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Upsides of recourse factoring

• Companies typically charge more for non-recourse than for recourse, with some exceptions. Outgo, for instance, offers low rates and provides non-recourse at no additional cost. Costs between companies can vary widely so you might find one company’s recourse factoring is actually more expensive than another company’s non-recourse factoring.
• It tends to be easier for carriers to get approved for recourse factoring. Factoring companies are often more flexible with their requirements when it comes to credit and payment history. 

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Downsides of recourse factoring

• You take on the responsibility for repaying your factoring company if the broker or shipper goes out of business and doesn’t pay their invoice. 
• Smaller, less-established companies, as well as those with really tight margins, could be severely impacted by losing a payment. Taking on a significant loss can wreak havoc on your cash flow or put you in debt
• More higher-risk brokers and shippers are eligible for recourse factoring so your customers could come with greater financial risk to you.
• It becomes more important to work with dependable and trustworthy customers, with a track record of making payments on time. This requires time spent researching their creditworthiness. 

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Non-recourse factoring

Non-recourse factoring offers you greater protection and less financial risk if a broker or shipper goes bankrupt or shuts down. However, it usually comes with higher costs to financially protect the factoring company that’s sticking its neck out. It also doesn’t protect against every circumstance, just what’s included in the factoring agreement.

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Upsides of non-recourse factoring

• Less financial anxiety and more stable cash flow
• It helps steer you away from higher-risk brokers and shippers who are less dependable for paying on time.

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Downsides of non-recourse factoring: Usually you’ll pay higher factoring rates than you will with recourse factoring.

• There are fewer numbers of brokers and shippers who are eligible for factoring
• Factoring companies often have limits on non-recourse, sometimes only covering payments if a company has closed or gone bankrupt.

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An exception to the rule that non-recourse factoring usually costs more is Outgo, which  exclusively offers non-recourse factoring and at some of the lowest rates in the industry, recourse or non-recourse. In addition, Outgo will still provide invoicing even when a broker or shipper aren’t approved for factoring. 

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How to decide which one is right for you?

Every freight company’s business is unique so there’s no one right answer for everyone. Overall though, the choice of whether to go with recourse or non-recourse factoring has to be balanced with a lot of other factors. Ideally, you want the most risk protection, but also the most flexible contracts, best rates and customer support, and the fastest funding speed as well.

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This requires learning more about different factoring companies and what they offer. Unfortunately, most companies don’t always make that information public. For the purpose of transparency, we created comparison pages where you can review how Outgo’s rates, funding speeds, contract lengths, and more. You can compare Outgo to the factoring industry in general, as well as popular factoring companies like TBS, Triumph, TAFS, and more. 

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At Outgo, we believe in working with individual freight companies to come up with the best plan for them. If you have additional factoring-related questions you want answered, give us a call at +1(888) 308-8810.

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