Factoring guide
Recourse vs non-recourse factoring
The short answer
With recourse factoring, if your customer never pays an invoice, you owe the factor for it. With non-recourse factoring, the factor takes that loss, usually only when the customer is insolvent and usually at a higher cost. Smart Freight Funding factors with recourse on purpose: it is what lets us offer no contract, no monthly minimum and the choice of which customers you factor.
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Recourse factoring
The factor pays you for the invoice and collects from your customer. If the customer never pays, the unpaid invoice comes back to you, and you repay it or replace it with another invoice.
Because the factor carries less of the risk, recourse factoring generally costs less than non-recourse.
Non-recourse factoring
The factor takes the loss on some unpaid invoices. The word covers less than it sounds like it does, so read the agreement for exactly what is included. It usually covers a customer who cannot pay because they have gone out of business or into bankruptcy.
Most unpaid freight invoices are not insolvency. They are disputes, and non-recourse agreements generally leave these with the carrier:
- Disputes over the rate, a shortage or damaged freight.
- Missing, unsigned or incorrect paperwork.
- A load the customer says was not delivered as agreed.
Why Smart Freight Funding factors with recourse
A factor that takes on your customers' credit risk has to make that risk predictable. That is why non-recourse arrangements commonly come with a contract term, a monthly minimum, or a requirement to factor every customer you have: the factor needs steady, locked-in volume to spread its losses across. The risk gets paid for one way or another, in the rate, in the terms, or in both.
We chose the other trade. Because we factor with recourse, we do not need to lock you in, and we don't:
- No contract to sign and no notice period to give.
- No monthly minimum and no minimum load count.
- You choose which customers you factor, customer by customer.
- Factor hard through harvest, not at all in March, and stop whenever you want.
How the risk stays low: checking credit first
Recourse does not mean you are on your own. The best protection against an unpaid invoice is not hauling for a customer who will not pay, so we credit check every broker and shipper before you can factor their loads, and clients can check the approved shipper list before they book.
After the load, we invoice your customer, track the payment and make the collection calls. If a payment looks late, call us early.
Questions to ask any factor
Before you sign anything, get a clear answer to each of these:
- Is it recourse or non-recourse, and what exactly triggers recourse?
- If it is non-recourse, which non-payments are covered and which are not?
- Is there a contract term or an early termination fee?
- Is there a monthly minimum, or a requirement to factor every customer?
- What fees apply besides the factoring rate?
| Recourse | Non-recourse | |
|---|---|---|
| Customer never pays | You repay or replace the invoice | Factor takes the loss if the cause is covered, usually insolvency |
| Disputes and paperwork problems | Yours to resolve | Usually still yours to resolve |
| Contract and minimums | None at Smart Freight Funding | Commonly required, to make the factor's risk predictable |
| Cost | Generally lower | Generally higher |
| What protects you | Checking the customer's credit before you haul | The same, plus the agreement's coverage terms |
Common questions
Why doesn't Smart Freight Funding offer non-recourse factoring?
Because non-recourse only works for a factor that can predict its volume, which usually means contracts, minimums or factoring every customer. We would rather give you none of those, and check every customer's credit before you haul for them instead.
Is non-recourse factoring always better?
Not necessarily. It usually costs more, often comes with a contract or minimums, and covers only certain kinds of non-payment. For many carriers, checking every customer's credit before hauling does more to prevent losses.
What happens if one of my customers doesn't pay?
Under recourse, an invoice the customer never pays comes back to you. We invoice your customers and make the collection calls, so call us as soon as a payment looks late.
Plain terms, in writing.
No contract, no monthly minimum, and you choose which customers to factor. The application takes a few minutes.