Types of Freight Factoring

Factoring is a financial service whereby a financial institution purchases invoices (i.e. accounts receivable) from a business, the seller, at a discounted rate. The person or company that purchases the invoices is called a factor. The discount amount is called the factoring fee. When you sell an invoice or account receivable to a factor, you receive cash for your invoice immediately and the factor is legally entitled to receive payment for the invoice. Factoring your receivables can give your business the cash it needs to expand and cover day-to-day operating expenses without going into debt or diluting your equity ownership in your company.

Factoring is different from traditional bank financing in many ways. First, your ability to qualify for factoring services is primarily based upon the credit worthiness of your customers, not you. While we generally choose to factor for businesses that are well managed and have a history of demonstrating integrity and honesty, our decision-making process, and that of most other factoring companies, centers around your customers and their ability to pay their bills. Second, getting setup with a factoring company is generally much quicker than applying for and getting approved for a bank loan. Most factors can have you set up in 3 days or less.

There are two types of freight factoring - recourse and non-recourse. Understanding the two types of factoring will help you make the best decision for the success and long-term growth of your trucking business.

Recourse Factoring
Recourse factoring is a type of factoring where the seller bears the collection risk. Factoring companies use your receivables as their collateral, and in many cases require additional collateral. If your customers don't pay their bills, then a recourse factoring company has the right to collect the money for the unpaid invoice from you. The factoring company typically holds some of your money in reserve and deducts the payment from the reserves or deducts the payment from other receivables being purchased. You, the seller, are solely responsible for all invoices that are purchased by the factor. Any payments that are not paid in full will be demanded back.

Non-Recourse Factoring
Non-recourse factoring is a type of factoring where the factor bears the credit and collection risk on purchased invoices. A non-recourse factoring company purchases invoices and suffers the loss if your customer, such as a freight broker or shipper, doesn't pay. The factor cannot demand payment on any purchased invoices if payment is not received due to credit reasons. Non-recourse factoring also generally doesn't require any additional reserves. Since non-recourse factoring companies don't charge you back when your customers don't pay their bills, there is no reason to hold reserves.

If you are looking to find a fast, but secure way to help stabilize or grow your business, then you should seriously consider talking to us about our non-recourse factoring program. Using a factor will give you access to quick cash when banks aren't willing to lend. Using a non-recourse factor won't come back to bite you if your customers go out of business. For more information about factoring, please give us a call at 855-465-4655, check out our blog, or visit one of our social media feeds.