Is nonrecourse factoring actually nonrecourse?

You need to understand what non-recourse means. Generally, it only applies when a payor becomes insolvent, bankrupt. Only in that case would there be no recourse. As the debtor, you would still have a little bit of exposure, as most factoring transactions withhold a reserve amount when funding. You would not get that paid by the factoring company. Only forgiven the amount of the advance.

Any other reason for non-payment and the factoring company will charge the advance back to you, even on a no-recourse agreement. Usually that would be in the case of an unresolved claim, missing or defective proof of delivery, basically anything other than the payor going out of business.

If a payor under a factoring assignment makes payment directly to the carrier, typically the carrier will be obligated to forward that payment to the factoring company immediately. To not do so could easily be construed as fraud.

 

We are with TBS Factoring and have not had any trouble at all and have had brokers go over 90 days, we do the flat 5% non-recourse and they pre approve all load amounts through internet credit checks and most of the time you will know right away.

 

Are you obligated to run every load through them? 5% is a #### load to give up on every load!

 

Why would you think that would be ok? It would be fraud. That would be roughly equivalent to borrowing money to buy a car, then turning around and selling the car keeping that money too while refusing to pay the original loan.

To be clear, the factoring company is not paying you. They are advancing or loaning you money secured by the account receivable. The loan is satisfied when the factoring company receives payment. Usually that comes from the customer. In the case of a claim, that would come from you. Ultimately you are the debtor and the responsibility remains with you, with the usually remote exception that an invoice isn't paid when a customer goes bankrupt.

Let's say you do what you propose and just somehow don't reimburse an advance or forward a mistaken direct payment. The factoring company can at a minimum lock you out of any assigned accounts and essentially freeze your cash flow, as well as sue. Negative credit reporting would be a given. Depending on the specific contract terms, they may be able to do more damage. More sketchy factoring companies will have blanket power of attorney clauses baked into their boilerplate that could potentially enable them to take title and sell everything you own at auction to settle an outstanding advance.

To be honest, it would take some extreme circumstances to get that far down a negative path. You would have to demonstrate egregious breach of trust before a factoring company (worth doing business with) would go to those lengths. That is, reach a point where their risk in ongoing good business with you is outweighed by your inability to manage claims and follow the terms on your end.

I'm sure that last remark will get jumped on by the "factoring is a payday loan" crowd. So be it. It is what it is, and good people can have bad things happen that might seem to support that. An example that you can probably find on here with a search would be something like this case:

Carrier moves about $20,000 a month for a specific customer, usually made up of loads running $1,500 - 3,000 each. One day a tarp rips in the rain and there is a cargo claim on a $25,000 piece of machinery. So at that moment, the customer has $15,000 in unpaid invoices working their way through the system. So right away, they already have that to apply against the claim and refuse to pay any outstanding invoice until the claim is satisfied.

Of course, now you have a factoring company in the middle who is also now out the money on those unpaid invoices they've already advanced to the carrier. Only now the factoring company has several other of the carrier's accounts. To get themselves whole, they may decide to apply 100% of assigned accounts towards the balance of that claim. So now, instead of just having one big customer locking up on them, the carrier has that and then some in the fallout.

To a small operator, that would be the difference between being able to hustle with other customers to bridge the gap and get the claim settled versus essentially being shut down until insurance paid out or they managed to settle the claim some other way.

So did the carrier get the short end of the stick really? Who is the bad guy? As the shipper I'd certainly hold unpaid invoices against a claim like that. The carrier damaged a valuable piece of my equipment in transit. It's on them. Carriers are required to have cargo insurance for that. If their insurance doesn't pay due to driver negligence, it's not my problem. As the factoring company, I've got exposure to all those unpaid invoices and need to collect. My leverage is the other accounts of theirs that I own and are active with positive cash flow. I'll be watching that carrier closely to make sure they are diligent about settling the claim while taking action to limit my exposure. I probably wouldn't pull the plug right away if they demonstrated that 1. they were aggressively working to resolve the claim and 2. had a track record that indicated that this was a one time fluke and not a sign of things to come. In other words, don't kill the cow because the milk was short one day.

Some are gonna say that this carrier got screwed. In my opinion it's a risk you take in the transportation business. Certainly one that can put you out of business. Factoring can and will expand that risk, especially if you've partnered with a factoring company that is only a partner in good times. That is, one that would leap to extremes before working with you in good faith to deal with a problem.

 

I've been dealing with the same factoring company for 2.5 years. What I learned was from reading posts here on TTR and asking questions back when I was making a choice of which one to deal with. Then more later as various issues occurred and were resolved. Usually due to improper expectations or ignorance on my part. The more I've learned about the transaction end-to-end, the better I've become at heading off issues before they happen.

Yes I am sure factoring companies screen client prospects that approach them for service. The foundation business is a line of credit, regardless of other services are offered. I can't recall them asking for references, but I'm certain they use a commercial credit reference like D&B. They probably also have one exclusive to factoring companies as well. I know for a fact they have that for payors, so not a stretch to expect they catalogue factoring debtors as well.