Factoring: Recourse vs. True Non-Recourse
Before understanding which program is best for you, check out our post about the benefits of a using factoring company.
You may be on the hunt for a factoring company and have heard different terms thrown around like reserves, recourse, chargebacks and non-recourse. Not every factoring company has the same program and not every company does it the same way. So, let’s truly understand what all the talk is about when these sales reps give you a call.
In a typical recourse factoring program, you have a set factoring fee, a separate reserve, and a set chargeback date. Recourse means “a source of help in a difficult situation,” being that the source of help is your factoring company and the difficult situation is your cash flow. In a recourse program, you are essentially borrowing the money from your factoring company for an extended period of time. However, if the factoring company does not collect on the payment from the broker, then you are hit with a chargeback. A chargeback means that you are charged for any uncollected funds from the brokers, typically between 60-90 days. Many factoring companies will hold separate funds rather than charging you directly for any unpaid invoices. A reserve is a percentage of money held to cover any unpaid invoices. When an invoice is paid normally to a factoring company, the reserve percentage that was held is released back to you. This means that each time you factor a load, there is always money entering and exiting your account.
True Non-Recourse Program: The OTR Capital Advantage
In a true non-recourse program, there are no chargebacks, no separate reserves held, nor a recourse/chargeback date. It’s simple; you submit your invoice to the factoring company, and you get paid. After the load was cleanly delivered, it is the responsibility of the factoring company to handle all billing and collections on the invoice. If something goes wrong with the broker not paying on a load, the best example being bankruptcy, the factoring company takes on the responsibility to cover the invoice, so you don’t have to. In a true non-recourse program, at no point will you be hit with a chargeback due to a brokers inability to pay. Once the funds are in your bank account, they are yours to keep.
Hybrid Non-Recourse Program: Other Factoring Companies
Other factoring companies may market a recourse program as a “non-recourse program.” However, recourse terms still exist at 60-90 days, also known as a hybrid non-recourse program. This, in fact, is still a recourse program, but if the broker doesn’t pay within 60-90 for any reason, the invoice will be charged back to your trucking company. Often times these chargebacks are non-negotiable, so you can find yourself in a very tough situation if you are depending on that money for either business or personal needs. This type of hybrid program can be difficult to catch. So it is important to look into a factoring offer for more than just the rate. Before choosing your factoring company, ask them if they will notify you before a chargeback hits. Because your company could be at risk if a chargeback hits and you weren’t prepared for it.
As you are looking at different factoring companies to see which one is best for your trucking company, be sure to understand the full details of your program. Don’t get tricked into thinking the separate reserve is additional savings account that your factoring company holds. Ask yourself, “do I have access to this reserve 24/7?” because the answer is most likely no. In our true non-recourse program, we take on the responsibility of getting you paid the same day/next day and handle the billing and collections from there. So, take on a different program to experience the OTR Advantage.
Questions or comments? Email us at firstname.lastname@example.org and you may see your question answered in a future post.