The Differences Between Recourse and Non-Recourse Factoring

Many beginners and even experienced fleet managers struggle to fully understand recourse and non-recourse factoring. Let us lay it out for you.

Which Factoring is Right for My Business?

Say you’re an owner-operator who’s interested in freight factoring because you no longer want to wait 30 days to get paid for hauling a load. You come across a few factoring companies offering different rates and notice there are two types of factoring: recourse and non-recourse.

You probably already know this, but unless you carefully read the agreement, you may not know what happens if there is a problem collecting the invoice payment! What type of factoring you signed up for will determine what happens if there is a problem with collecting the invoice.

Although InstaPay offers non-recourse with no hidden fees, there are multiple routes factoring scenarios can go. Below we explain the pros and cons of each type of factoring and how you can get paid in a day.

Recourse Factoring

In recourse factoring, the company has recourse and therefore can come after you if the broker fails to pay them.

If you choose recourse factoring and there is a problem with an invoice,youare ultimately responsible for the invoice. If an invoice isn’t fully paid by your client, the factoring company can make you pay the difference between what was collected and what was the expected payment. If your client goes bankrupt, you are responsible for paying the factor.

Factoring companies can collect that $100 from you in various ways. They can take a charge against your reserve, or they may offset another invoice. They may even ask you to pay them directly. Your factoring fee is non-refundable.

This is a risk-sharing agreement that makes you more responsible for the payment practices of your customers. However, if you have great customers who pay on time, recourse factoring can be a wonderful solution since you will typically pay a lower fee compared to non-recourse factoring rates.

Non-Recourse Factoring

When you elect to do non-recourse factoring, you are not liable to collect missed payments from your clients. Non-recourse is more complicated than recourse factoring, but it may protect your business interests.

If your customer goes broke, the factoring company loses the money, not you. There is no legal definition of non-recourse, though. A standard dictionary definition of non-recourse factoring is “secured by property or other collateral, with the borrower not being personally liable for further compensation if the debt is not repaid.”

To truly understand what non-recourse means in your case, you need to carefully read your contract to see what kinds of non-payment are “excused,” meaning you don’t have to pay the loss to the factoring company.

Just because your factoring contract is non-recourse doesn’t mean there aren’t other circumstances where you might have to either help your factoring company or be asked to pay something back.

For example, if you want to leave your factoring company you may be required to clear out all existing purchased invoices, whether that is through a buy-out from another factor or you buying back the invoices yourself. If there is a dispute between you and your customer, and your customer doesn’t pay the entire invoice, you may be asked to help with resolution.

Sometimes there is a mistake – a receipt is not provided, an incorrect invoice amount, a charge against the invoice for the condition of the load – and the factoring company will ask for your help. This is a natural expectation because you have a direct relationship with your customer, not the factoring company. Because some of your customers may not cooperate with the factoring company to resolve issues, you will be the key to clearly communicating between the two parties and therefore mistakes being corrected.

On the other hand, if you were doing recoursefactoring, the factoring company wouldn’t even try to help – they would just deduct the missing amount on the payment directly from your account.

Hidden Fees

Finally, keep in mind that whether you are choosing recourse or non-recourse, many factoring companies charge hidden fees for:

  • incorrect paperwork
  • postage
  • customers who don’t pay on time
  • putting the money in your account
  • not meeting a certain volume
  • leaving the factoring company, especially if there’s a contract
  • expediting payments

These fees can add up to a significant amount of money if you don’t pay careful attention!

In Conclusion

Here’s a quick chart to help you understand your factoring agreement.

Instapay offers non-recourse factoring with no additional fees or contract term commitment. You just pay a 3% flat rate and submit your invoices by 11:30 am EST for same-day payment! Our quick and reliable service allows you to gain working capital to reach your business goals without hiccups.

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We at InstaPay want to help your company grow and look forward to working with you.