Recourse and Non-Recourse Factoring: Understanding the Difference

by James on July 24, 2017 · 0 comments

accutracInvoice factoring is currently a popular way to improve cash flow in the trucking and transportation industries. Freight bill factoring in particular has allowed numerous trucking company owners to improve cash flow in innovative ways. Access to immediate cash — rather than waiting 30 to 60 to 90 days for invoices to clear — allows trucking companies the ability to grow.Even if clients have yet to pay the balance on outstanding invoices, the trucking company has the financial resources to expand operations and take on new and larger accounts.  Invoice factoring allows you to create a sustainable and affordable financing process that you can use to maintain future accounts and build toward the future.

Smart owners of transportation or trucking companies use invoice factoring as one part of their overall financial playbook. One of the key tactics to keeping a healthy and steady cash flow is to ensure that invoicing and accounts receivable are carefully and tightly managed. Any owner will have countless stories about how delayed payments are problematic. According to the experts at Accutrac Capital the larger your company, the more likely you’ll encounter an important client who demands extended credit terms. This causes what is often known in the industry as a “roller coaster effect” on cash flow. This can prevent you from being able to predict and control revenue, which in turn can hinder your ability to grow at scale.

This is why so many companies are implementing freight bill factoring as a standard part of their accounts receivable process. Factoring benefits your business’s cash flow in two major ways. First, factoring advances credit on your accounts receivable in the form of real cash, thereby helping you continue to build up cash flow. Secondly, factoring companies collect payment on those receivables from your clients so you don’t have to. Having more raw resources on hand as well as a third-party factor that handles collections on our behalf gives you the time and money you need to build your company.

The benefits of factoring feature the ability to turn outstanding invoices into cash within hours of verifying the delivery. Additionally,factoring can improve your credit rating by allowing you to pay your bills sooner. Factoring also increases overall buying power by enabling you to take advantage of cash purchase discounts, as well as increase sales and marketing efforts.

But what happens if one of your clients does not pay one of your invoices on time? This is when “recourse” and “non-recourse” factoring enter into the equation. Recourse factoring is the most common type to be found in the accounts receivable financing industry. Recourse is essentially an arrangement between your company and the invoice factor acting on your behalf that you, the client, will buy back the invoice should your customers  fail to pay for any reason.

With a non-recourse agreement, on the other hand, the factor accepts the risk of non-payment by your customers, should they fail to pay by reason of insolvency. It’s important to note, however, that a factor will only offer this option on invoices associated with debtors who are more likely to pay. If your clients have poor credit ratings or payment histories, you are not likely to secure non-recourse factoring. Regardless of the type of account, a good factor goes to great lengths to collect on your invoices. Collection calls from the factor to a debtor will typically start 35 to 40 days after the invoice went out and will continue for 4 to 6 weeks.

Regardless of the type of factoring pursued, your best first step is to contact a reputable factoring company and discuss their terms. It is to your advantage to conduct due diligence to find the right partner, but when you do, you open the door to better cash flow solutions and the potential for better overall growth.

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