The Differences Between Recourse and Non-Recourse Factoring
There are two types of factoring agreements offered by companies. Recourse factoring has its own benefits compared to non-recourse factoring. The advance rates and responsibilities in case of non-payment may differ greatly company to company.
So which factoring is right for you? We laid out the key differences below so you can pick what’s right for you!
Recourse factoring has low factoring fees. Since there is a risk of you being responsible for your broker not paying, factoring companies will charge a lower rate for recourse clients. This lower rate is an incentive for you taking on the responsibility of shippers and brokers not paying. However, since you have a low initial factoring fee rate, companies will typically give you lower advance rates. The advance rate is is the amount of money the factoring company gives you upfront.
Overall, the factoring company will not offer help with broker disputes if the broker is not paying. Recourse factoring is a great option for those who have long-term, secure relationships with their brokers and can rely on them to pay factoring companies on time and rely on them to internally resolve payment issues with no hassle.
Unlike recourse factoring, you may pay a little bit higher of an initial factoring fee. This is because you, as a carriers, will not be responsible for a broker not paying on a load. Factoring companies charge you a slightly higher factoring rate to make up for that risk. If a broker does not pay, the company absorbs that loss and you're not expected to pay anyone back. You may be expected to help resolve payment disputes together with your factor and broker.
Since you are paying a higher initial factoring fee, factoring companies ease your burdens and give a higher advance rate. That means if you factor with a company like InstaPay, you pay a 3% factoring fee on the invoice and immediately get the rest of the money in your account on the same or next day. Factoring companies like us don't keep your money on hold.
Overall, if you enjoy getting full advances and don't want to take on more responsibility of a broker not paying, a slightly higher initial factoring fee may be worth getting rid of the headache of disputes and recourse.
At the end of the day, you get to decide what trade-offs are worth it for you. You also need to take into consideration that you may be paying lots of hidden fees on top of the factoring rate, whether you choose to do recourse or non-recourse. Be sure to consider all advantages and disadvantages of a factoring company's recourse contract and non-recourse contract before signing.