Lesson #3 - Non-Recourse Factoring

Let’s quickly recap what we learned in Lesson #2.

• There are two basic kinds of factoring: Recourse and Non-recourse.
• Recourse factoring means the factoring company has legal recourse for unpaid invoices.
• Recourse is favored by larger operators, i.e. fleets.

What’s Non-Recourse Factoring?

On to Lesson #3. Recourse is the most common kind of factoring, generally used by medium-sized operations. Its downside is the trucker is still liable for unpaid invoices.

But what if you don’t want to be liable for your unpaid invoices? What if your little company, “Tailgate Trucking” (basically you and your brother), can’t afford a $10,000 hit if somebody skips? In that case, your best option is non-recourse factoring.

Definition: non-course factoring is the sale/purchase of accounts receivable without the option of legal recourse in case of default.

Non-recourse is designed for small companies, usually owner-operators. It’s got its own downside though, which is it’s more expensive per load than recourse factoring. Why? That’s obvious; the factor is taking on all the liability.

Non-Recourse Financing in Everyday Life

Non-recourse financing takes lot of forms and it’s very common. Chances are you’ve been involved in it yourself several times this week. When was the last time you used a credit card?

Credit cards work on the same principal as non-recourse factoring, at least for the merchant. They’re optional of course, so not all businesses offer them. Example: let’s say you had lunch at Bub’s Diner and paid for it with your MasterCard. Now Bub has done a contract with the card company signing over all rights to bills paid with MasterCard in exchange for immediate payment (less a percentage).

It’s a pretty good deal for Bub. If you don’t pay your entire MasterCard bill this month—in other words if you don’t pay for your meal—no problem, MasterCard is good for it regardless. Suppose you hit a financial bump and you only pay your minimum for a few months, MasterCard can’t go to Bub and demand payment. In effect, it bought Bub’s invoice to you. The card company’s deal is non-recourse. Merchants love that, though of course they pay for it.

Note: MasterCard’s deal with you is a loan, not sale/purchase, so it doesn’t work the same in both directions. By definition, factoring is a business-to-business enterprise, not business-to-consumer. Credit cards work partly on the factoring principal, but they’re not factors.

Plainly stated, non-recourse factoring is considered the safest choice for carriers planning to factor their invoices. The reason this type of factoring is safest is because carriers know exactly what the factoring will cost and when they will be paid. This type of factoring absorbs the risk of legal costs, collection fees and/or loss if the customer is either slow to pay or doesn’t ever pay

The Downside of Non-Recourse Invoice Factoring

Back to trucking. Let’s say your business, Tailgate Trucking, has decided to sign a non-recourse contract with a reputable factoring company, “Crown Factoring.” Your deal with Crown is $10,000 for all your loads on one run. (It doesn’t necessarily have to be all your loads, but let’s use that as an example.)  Crown buys Tailgate’s invoices, less its fee. In this case (example only), its fee is 8%. It pays you $9,200.

That’s $300 less than it would have paid a bigger business—FastFleet Trucking—for the same load, but that’s because Crown’s deal with FastFleet was recourse. If somebody skips, FastFleet is liable. Tailgate isn’t.

Takeaway

But what if you’re willing to take on the risk of a big hit? Can you sign a recourse deal with FastFleet and get better terms? Probably not, but that’s a topic for another lesson. Here’s your takeaway for this one.

• Non-recourse factoring means the seller (the trucker) is not liable for unpaid invoices. 
• Non-recourse is usually an option for owner-operators.

For many truckers factoring is a good deal, but of course factoring involves various details that require your commitment and careful attention. Stick with the remainder of this factoring course and you’ll learn how to tell good deals from bad, and how to make factoring work for you. See you at your next class!