Cash flow is the lifeblood of every fleet operation. Without it, covering essential expenses like maintenance, fuel, and repairs becomes a challenge. When cash runs dry, delivering the top-tier service your fleet is known for could be at risk.
Many fleet owners turn to freight factoring to ease their cash flow concerns, but not all factoring is the same. There are two main types: recourse and non-recourse. Knowing the difference between them can help fleet owners better manage risks, control costs, and keep their operations running smoothly.
What is Non-Recourse Factoring?
Non-recourse factoring is a financial arrangement where the factoring company assumes the risk of non-payment from the fleet's customers, typically brokers. This type of factoring is particularly appealing to fleet owners who are concerned about the possibility of non-payment or encountering a double-broker scenario, where payment becomes complicated or delayed.
Benefits of Non-Recourse Factoring for Fleets
Risk Mitigation
The primary advantage of non-recourse factoring is that it shields your fleet from the risk of non-payment due to bankruptcy. If a broker defaults, the factoring company absorbs the loss, not your fleet.
Simplified Accounting
With non-recourse factoring, you can manage your cash flow more effectively, knowing that your revenue is secured. This allows for easier financial planning and less stress about potential losses.
Drawbacks of Non-Recourse Factoring
Higher Fees
The peace of mind that comes with non-recourse factoring comes at a cost. Non-recourse factoring companies charge higher fees to compensate for the increased risk they assume.
Stricter Credit Criteria
Non-recourse factoring is typically only available for brokers with strong credit profiles. This may limit your ability to use this option if your customers don't meet the stringent requirements.
Doesn’t Cover All Non-Payment Situations
Most non-recourse factoring contracts only protect your fleet from non-payment due to bankruptcy or brokerage closing. It does not apply to situations like double brokering or disputes.
When is Non-Recourse Factoring the Right Fit for Fleets?
Non-recourse factoring is most beneficial for fleets that prioritize risk avoidance over cost. If your fleet frequently deals with new or smaller brokers, or if you've experienced a client bankruptcy in the past, this option can provide the security you need to keep your operations running smoothly.
What is Recourse Factoring?
Recourse factoring places the risk of non-payment back on the fleet owner. While this might sound less appealing at first glance, there are significant advantages that make recourse factoring an attractive option for many fleets.
Benefits of Recourse Factoring for Fleets
Lower Fees
Because the factoring company is not taking on the risk of non-payment, recourse factoring typically comes with lower fees. This can be a major advantage for cost-conscious fleet owners who are confident in the creditworthiness of their customers.
Flexibility
Recourse factoring tends to have more lenient credit requirements, making it accessible to a broader range of customers. This can be especially useful for fleets that work with a mix of brokers, including those with less established broker credit histories.
Drawbacks of Recourse Factoring
Risk Retention
The biggest downside of recourse factoring is that your fleet is responsible for any unpaid invoices. If a broker fails to pay, you’ll need to cover the cost or negotiate with the broker directly.
Could Lead to an Increased Workload
With the potential for unpaid invoices, recourse factoring can lead to additional administrative work, as your fleet may need to follow up on payments for aging collections.
When is Recourse Factoring the Right Fit for Fleets?
Recourse factoring is a great fit for fleets with a strong handle on their customers' creditworthiness and those who are willing to take on a bit more risk in exchange for lower fees. If your fleet operates with long-standing, reliable brokers, recourse factoring can be a cost-effective solution.
Recourse vs Non-Recourse Factoring: 4 Key Differences
As you can see, both non-recourse and recourse factoring offer their individual benefits and drawbacks. Here are a few more key differences between the two:
- Risk Management – Non-recourse factoring shifts the risk to the factoring company, while recourse factoring places it on the fleet owner.
- Cost – Recourse factoring is generally less expensive due to the lower risk for the fleet factoring company. Recourse factoring fees are typically between 1-3%, while non-recourse factoring fees could be up to 5%.
- Qualification Criteria – Non-recourse factoring requires customers with strong credit, while recourse factoring is more flexible.
- Impact on Cash Flow – Both options provide immediate cash flow, but non-recourse factoring offers greater security at a higher cost.
Recourse vs Non-Recourse: Choosing the Right Option for Your Fleet
When deciding between non-recourse and recourse factoring, consider the following:
- Creditworthiness of Your Customers – If you work with trusted brokers, recourse fleet factoring might be a viable option. If you work with one of the many brokers that factors with Denim, you know that you’ll always be paid on time.
- Risk Tolerance – If you prefer to avoid risk, non-recourse factoring provides the peace of mind you need.
- Cost Considerations – Weigh the higher costs of non-recourse factoring against the potential risks of recourse factoring.
- Growth and Expansion – If you plan to grow your fleet, securing reliable cash flow through recourse factoring might support your expansion more effectively with lower rates.
Choosing between recourse vs non-recourse factoring depends on your fleet’s specific needs and risk tolerance. While non-recourse fleet factoring offers protection against non-payment, it comes with higher costs. Recourse factoring is more affordable but may carry more risk. At Denim, we offer recourse factoring because it gives both us and our customers more flexibility to grow their fleet and cut costs. If you’d like to learn more, request a demo today!
%20(1).jpg)
.jpg)
.png)
.png)
.png)
.png)
.png)
.png)
