The Differences Between Recourse and Non-Recourse Factoring
There are two types of factoring agreements offered by factoring companies: recourse and non-recourse. Each of these types of factoring has its own benefits and differences. For example, the advance rates and responsibilities in case of non-payment may differ greatly for non-recourse and recourse from 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 your business!
Recourse factoring has lower factoring fees compared to non-recourse factoring. Since you, as a carrier, take on the risk of being responsible for a broker not paying, factoring companies will charge you a lower rate. This lower rate is an incentive for carriers to take on the responsibility of shippers and brokers not paying. However, since you have a low initial factoring fee, factoring companies will typically give you lower advance rates.
The advance rate is is the amount of money the factoring company gives you upfront. The lower advance rate makes up for the fact that you will already be receiving more money upfront from your factoring agreement. Instead of paying $30 on a $1000 load with a 3% factoring rate, you might just pay $20 with a 2% factoring rate. Over time, this adds up as money saved!
Moreover, 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 1) pay factoring companies in a timely manner, and 2) to internally resolve payment issues with little to no hassle.
Unlike recourse factoring, you may pay a little bit higher of an initial factoring fee with non-recourse factoring agreements. This is because you, as a carrier, will not be responsible for a broker not paying the factoring company on a load. Factoring companies charge you a slightly higher factoring rate to make up for the risk that they take on of non-payment. If a broker does not pay, the company absorbs that loss and the carrier is not expected to pay the factoring company back. You may be expected to help resolve payment disputes together with your factor and broker, though.
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. That's a 100% advance rate, minus the factoring fee. Some factoring companies will keep your money on hold as reserves, and some will give it to you immediately. This depends on the company.
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. This is especially a good option for carriers who don't have long-term relationships with brokers or like to haul for many different types of brokers.
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. Either way, factoring is a great way to get immediate cash flow - you just have to pick the right type of factoring for your business!