Originally Posted by KeyFactor

Very well explained. I am the owner of a factoring company. The whole question of which type of factoring to use can be very specific to the carrier's situation. I offer both recourse and non-recourse factoring, but I have always found non-recourse to be a very expensive option. In my area non-recourse rates are twice as high as for recourse...just makes no sense when I hear how much margins are under pressure these days. I'd be curious to know the opinions on what everyone uses most and why it is the best choice.

It comes down to risk tolerance for us as much as you. As a new carrier I don't know what brokers are good or bad beyond the credit reports I can get. After a few months, I'll have some business experience with several and will likely switch to a full-recourse deal. At that point, I will know which ones in my little corner of the market are hard to collect from and to avoid. I will feel a lot better about taking on the additional risk of full recourse.

I rarely use a factor. When I do, I use one that does non-recourse. The main reason I would use a factor are two fold. One is cash flow. The other is that it gives me a way to see how someone pays. The factor that I have used also doesn't have additional fees or minimum number of bills that I must factor. I only factor what I want. I probably don't factor one invoice in six months or longer.

Unless you are careful about checking credit, recourse factoring can cause some problems. I have a friend who used a recourse factor and had a couple of large invoices charged back on him at one time. It really put him in a bind. The factor he used was also charging a high percentage. I don't think my friend was checking credit closely or his factor wasn't. In any case, he changed factors after that charge back. I don't remember if he ever got his money from the accounts.

If the broker or shipper is well established with a good pay record, recourse factoring can work well for you, depending on the percentage. I have looked at many factors and some will advance their percentage to the point that it makes as much or more sense to use a non recourse factor.

The factor that I use charges a flat 5% for non recourse. It is high, but once I send the invoice to them I can forget about it. One factor that I remember talking with charges 1% per week. By the time the invoice is received by the factor, billed, received and paid, you could easily be looking at 4-6 weeks. At 1% per week, you could pay as much or more for recourse. Some are more realistic and fair in their fees. There are some factors which require a minimum amount you must factor each month. Others charge a minimum monthly fee, whether you factor anything that month or not. Some require you to factor all bills in order to do business with them. Most of the major brokers offer "quick pay" which will discount the bills for early payment. I have pretty much limited myself to the number of companies with whom I am doing business. I usually discount my bills from 1 1/2- 2% to pay early. I can have money in my account within 24-48 hours from the time I send my invoice and bills to them.

I have some people who pay COD. If I think there might be a problem collecting my money then I won't do business with that broker or shipper.

Here's a great place to learn about factoring. This blog has a series called Factoring 101 currently with 17 posts on the topic. Very factual and in trucker speak. Great source of information.

http://www.cash4truckers.com/blog4truckers/financial

Your link doesn't point to the right place.

http://www.cash4truckers.com/blog4truckers/financial

Originally Posted by G/MAN

The factor that I use charges a flat 5% for non recourse. It is high, but once I send the invoice to them I can forget about it. One factor that I remember talking with charges 1% per week. By the time the invoice is received by the factor, billed, received and paid, you could easily be looking at 4-6 weeks. At 1% per week, you could pay as much or more for recourse. Some are more realistic and fair in their fees. There are some factors which require a minimum amount you must factor each month. Others charge a minimum monthly fee, whether you factor anything that month or not. Some require you to factor all bills in order to do business with them. Most of the major brokers offer "quick pay" which will discount the bills for early payment. I have pretty much limited myself to the number of companies with whom I am doing business. I usually discount my bills from 1 1/2- 2% to pay early. I can have money in my account within 24-48 hours from the time I send my invoice and bills to them.

5% for non-recourse sounds like a pretty good rate especially with no minimum volume commitments, but would they accept invoices from customers that take more than 30 days to pay and do they offer next-day funding? If not, their rate can't be compared to the non-recourse 4%-6%. I hear you on the additional fees...we try to keep things simple and not nickel and dime you. I regularly compete against non-recourse rates of 7.5%, but of course that depends on volume. If you pay 5% for non-recourse and can only sell invoices paid in less than 30 days, it may not be the best deal:

Say $100K of invoices
70% pay in 30 days and 30% pay in 45 days
non-recourse rate of 5% vs recourse of 4% with 15% reserve

Non-recourse only buys $70K of invoices and gives you $66.5K in funding on day 1 pus the $30K you collect on day 45. You paid $3.5K.

Recourse buys $100K and gives you $81K of funding on day 1 and $13K of funding on day 45. You paid $6K, but you got $14.5K more in funding from day 1 because the recourse guy bought everything AND you didn't have to manage collections on the $30K that you couldn't sell to the non-recourse guy.

OR you sell the recourse guy the same $70K that the non-recourse guy would buy. Here you get day 1 funding of $56.7K, another $10.5k on day 30 and $30K on day 45. You paid only $2.8K for this rather than $3.5K for non-recourse, but you got slightly less initial funding and had to do collections on the $30K you didn't factor.

It all depends on your needs: if you need more initial funding and don't want to do collections, go with recourse and set aside some of the additional funding as a cushion to offset any chargebacks. After you have this cushion built up, you will be paying less for your monthly factoring services (4% versus 5%), which can really add up over a year. If you don't need as much initial funding but want to minimize costs, sell the recourse guy the same invoices as you'd sell the non-recourse guy. In my example, you'd get slightly less funding, but pay less too..., but remember to build up your reserve! Seems to me recourse works better in the long run, but I am happy to offer both to my clients.

Originally Posted by KeyFactor

5% for non-recourse sounds like a pretty good rate especially with no minimum volume commitments, but would they accept invoices from customers that take more than 30 days to pay and do they offer next-day funding? If not, their rate can't be compared to the non-recourse 4%-6%. I hear you on the additional fees...we try to keep things simple and not nickel and dime you. I regularly compete against non-recourse rates of 7.5%, but of course that depends on volume. If you pay 5% for non-recourse and can only sell invoices paid in less than 30 days, it may not be the best deal:

Say $100K of invoices
70% pay in 30 days and 30% pay in 45 days
non-recourse rate of 5% vs recourse of 4% with 15% reserve

Non-recourse only buys $70K of invoices and gives you $66.5K in funding on day 1 pus the $30K you collect on day 45. You paid $3.5K.

Recourse buys $100K and gives you $81K of funding on day 1 and $13K of funding on day 45. You paid $6K, but you got $14.5K more in funding from day 1 because the recourse guy bought everything AND you didn't have to manage collections on the $30K that you couldn't sell to the non-recourse guy.

OR you sell the recourse guy the same $70K that the non-recourse guy would buy. Here you get day 1 funding of $56.7K, another $10.5k on day 30 and $30K on day 45. You paid only $2.8K for this rather than $3.5K for non-recourse, but you got slightly less initial funding and had to do collections on the $30K you didn't factor.

It all depends on your needs: if you need more initial funding and don't want to do collections, go with recourse and set aside some of the additional funding as a cushion to offset any chargebacks. After you have this cushion built up, you will be paying less for your monthly factoring services (4% versus 5%), which can really add up over a year. If you don't need as much initial funding but want to minimize costs, sell the recourse guy the same invoices as you'd sell the non-recourse guy. In my example, you'd get slightly less funding, but pay less too..., but remember to build up your reserve! Seems to me recourse works better in the long run, but I am happy to offer both to my clients.

There are other reasons for a trucker to use non recourse over recourse factoring beyond the 2 to 3 percent greater cost. One is if they don't have the capital back up to handle a returned uncollected invoice or the possibility of several uncollected invoices coming in at the same time. Non Recourse is best for the newer carrier to utilize for the purpose of building a capital reserve so they can move to a Recourse contract. Then from there build even greater capital reserves so they no longer need factoring at all. Factoring is a tool when used correctly (for the purpose of capitalization) can help grow a carrier financially.

Listen tomorrow (5/18/2011) to the Lockridge Report on Sirius/XM 106 as we'll be discussing factoring for the O/O and small carrier.

Thanks for correcting the link to the Factoring 101 articles.
http://www.cash4truckers.com/blog4truckers/financial