Recourse vs Non-Recourse Factoring: Choosing the Right Solution
Freight factoring has become an essential tool for businesses to survive in today’s market conditions. There are two types of factoring solutions – recourse and non-recourse factoring.
While both solutions offer financial support for your business, they do have key differences that may impact your cash flow management. In this blog, we’re going to discuss the distinctions between non-recourse and recourse factoring, and we’ll help you determine which factoring solution is best for your business.
Recourse Factoring
Recourse factoring involves the factoring company purchasing a carrier's invoice, with the carrier taking on the credit risk for the invoices they sell. To protect carriers, a reputable factoring partner will provide a proactive factoring approach to help carriers avoid issues with unreliable debtors.
Before funding an invoice, the factoring company will thoroughly research debtors and offer advice to carriers about the risks associated with a specific customer based on their credit history. This strategy will significantly reduce the likelihood of carriers experiencing financial issues due to an unpaid invoice.
Recourse factoring also provides additional benefits, such as:
- Lower rates
- More flexibility with contract terms
- Not as selective of an approval process
- Same day and next day payment options
- Unlimited number of invoices you can fund per month
- More autonomy when it comes to customer relationships
Non-Recourse Factoring
On the other hand, non-recourse factoring places the risk of unpaid invoices onto the factoring company. While non-recourse factoring reduces the chance of carriers facing financial consequences of customers not paying, this piece of mind comes at a significant cost. Non-recourse factoring often involves higher rates, more selective approval processes, potential credit limits restricting the amount you can factor on a monthly basis, and reduced control over client relationships.
What Is The Right Factoring Solution For You?
When it comes to choosing a factoring solution, many carriers prefer recourse factoring for its additional benefits and fast funding to keep cash flowing through their businesses.
However, choosing the right factoring solution ultimately boils down to your factoring company. Having a reputable partner is essential, otherwise you will face cash flow issues regardless of your factoring solution. When looking for a reliable factoring company, make sure they will provide you with complimentary credit checks on debtors that you are considering working with, helping you avoid unreliable customers and operational challenges due to cash flow issues.
Check out our factoring services to learn more about the various invoice factoring solutions for your business!
