Factoring With and Without Recourse. What is the Difference Between the Two?

Factoring, also called accounts receivable financing, is completely justifiably popular with U.S. companies from a wide variety of industries. And the trucking industry is no exception. In simple terms, it represents the payment of customer invoices.

That is, you don’t have to wait until 30, 60 or 90 days have passed in order to get paid for a service that has already been rendered. As a result, you increase your cash flow and don’t have to worry about covering your operating expenses. In addition, factoring is a real chance to expand your business and therefore increase your profits.

It seems like everything is perfect. But is it really so? What will happen if for some reason the client does not pay the invoice? The answer to this question directly depends on what kind of contract is drawn up with the factoring company.

Factoring with and without recourse

There are two types of factoring:

• With recourse.
• Without recourse.

Factoring of the first type is most common. With it, your trucking company assumes the obligation to buy back all invoices for which the factoring company cannot receive payment from your client. That is, you are fully 100% responsible for any non-payment by your client.

The second type of factoring is less common. With it, the factoring company assumes virtually all the risks associated with non-payment. But you need to keep in mind here that the lack of recourse does not guarantee that your trucking company is fully protected from unforeseen events. Typically, situations in which you are not liable for a customer’s non-payment are very specific and very rare.

Consider one such situation. Some factoring companies offer a waiver of recourse, which only becomes valid if the debtor is declared bankrupt under all US law. In this situation, there will be restrictions on non-recourse agreements by debtors with good credit ratings. It follows that debtors with poor credit ratings will have no recourse at all under a non-recourse agreement. Since the vast majority of non-recourse agreements have a higher factoring rate, it is important to understand whether a higher rate really makes sense in your particular case.

It doesn’t matter whether your trucking company plans to use recourse or non-recourse factoring. What matters is the meeting with the factoring company’s staff to discuss the terms of cooperation. It is best to give preference to reputable factoring companies. Although this advice seems trivial, it works.

Factoring companies start calling their clients’ clients 40 days after the invoice is sent and continue to do so for several weeks. Note that after 90 days, the factoring company may return your client’s invoice to you. However, in doing so, it must explain how to resolve the problem.

Thus, you should cooperate with the factoring company in order to avoid difficulties in paying your invoices. And, of course, try to provide services to clients with a good credit and payment history.