Recourse Vs. Non-Recourse Factoring: Which Should Trucking Companies Choose?

In an industry where customers have 30 or even 60 days to pay, it makes all the sense in the world for carriers to factor their invoices. Factoring provides dependable, quick cash flow, and with a contract-free tool like Bobtail, the cost can be as low as 1.99%, based on your monthly volume. But not every factoring service is as straightforward as Bobtail.

Traditional factoring contracts are dense with legalities and technical details, any one of which may jump up to bite an unprepared business owner. In fact, these are the scenarios we founded Bobtail to avoid, creating a factoring tool built by truckers, for truckers, and designed for simplicity and transparency.

Looking for a simpler way to factor your trucking invoices? Find out why Bobtail is different.

One of the most common complications in truckload factoring occurs when the customer fails to pay an invoice. Who’s responsible for collecting that sum? Most truckers would prefer the answer be the factoring company. After all, factoring is a process in which a third party essentially buys your invoice; it seems like the principle of “buyer beware” should apply.

When you look closely at factoring contracts, however, you may find that the trucking company retains some responsibility for its invoices. If a broker fails to pay, the factoring service may come back to the carrier to collect. Non-recourse factoring is supposed to be a solution—but, in fact, choosing recourse vs. non-recourse factoring isn’t as easy as it looks at first glance. So should you, as a trucking operator, choose factoring without recourse or go with a recourse agreement? Here’s what you need to know to make that decision.

Defining Factoring, Recourse And Non-Recourse

Factoring, with and without recourse, is a financial tool. The factoring company (or “factor”) provides immediate payment for your invoices and collects payment from your customer. This process gives carriers immediate cash flow, eliminating the weeks-long wait for direct payments from brokers and shippers.

So what’s the difference between non-recourse vs. recourse factoring? Non-recourse factoring bundles collections insurance into the agreement. It makes sure the trucker doesn’t have to repay the factor if the customer fails to pay. For instance, say a broker hires you to deliver the load. You complete the job and invoice the broker—but then that broker files for bankruptcy before paying the freight bill. With a non-recourse factoring agreement, the factor can’t ask you for repayment. If it’s a recourse factoring deal, the factor may ask you to cover the bill (though not necessarily, as we’ll explore below).

With recourse factoring, the trucking company takes full responsibility for payment. With non-recourse factoring, that responsibility generally lies with the factor. However—and this is a crucial detail—that’s not always the case.

The Fine Print On Non-Recourse Factoring Agreements

Non-recourse factoring sounds good. It grants some protections to carriers. But when you start to look at the details, there are lots of reasons a recourse factoring agreement is often the better choice. Here are the major hidden problems with most non-recourse factoring deals.

1. Non-recourse factoring is essentially a form of insurance, and like all insurance products, you have to pay for it. Carriers can expect to pay above 3.5% to 5% of the invoice value for non-recourse factoring; compare that to Bobtail’s small-fleet recourse rate of just 3.24%.
2. In another parallel to the broader insurance industry, the non-recourse factoring business model depends on paying out less than it collects. That creates a strong incentive to deny claims. Look closely at the contract: You’ll find most non-recourse deals apply in extremely limited scenarios, usually only in the event of the debtor’s legal bankruptcy. Disputed invoices aren’t covered. Damaged freight isn’t covered. Unless the debtor goes out of business and files the right paperwork—paperwork the borrower will be required to submit in full, by the way—the factor may be able to demand repayment from its client. That’s you.
3. When a factor includes insurance on their deals, they often take control of who you work with. If a broker or a shipper doesn’t pass their credit check, you can’t take their business. It doesn’t matter if you’ve known and worked well with the company for a decade. When a non-recourse factor doesn’t approve a customer, they can prevent you from hauling their freight.

Non-recourse factors exert this level of control through complex contracts, many of which lock the borrower into exclusive deals with a single funding entity. For the duration of the contract—usually between one and three years—the contract states that all payments to the borrower must flow through the factor, giving them control over your client roster. They may charge hefty non-compliance fees if you bill a broker or shipper directly while under contract. This isn’t just a financial service; it’s a power-sharing agreement—and the greatest cause for caution in working with non-recourse factors.

For all these reasons and more, Bobtail provides recourse factoring for its clients without contracts or complex legal entanglements. With Bobtail, you’re in control. But that doesn’t necessarily mean you’ll be responsible for repayment if a debtor fails to meet their obligation.

How Bobtail Protects Borrowers Without Non-Recourse Contracts

If you accept a recourse factoring agreement, and a customer leaves an unpaid invoice, you may think you have to pay the factoring company back. That’s not the case. At Bobtail, we have a tremendous track record of collecting on problematic invoices without passing the cost on to our customers. In fact, we have two viable avenues for collection.

The first option applies to brokerages that go bankrupt. Under U.S. law, every brokerage has to maintain a bond of $75,000 to protect their vendors from such a bankruptcy. Our initial step in protecting our clients from failed payments is to draw on that pool of money; that’s what it’s there for, and we’ve had a lot of success collecting via brokerage bonds.

Another law in the U.S. places responsibility for payment on the shippers that originate freight movements. If a broker declines payment or simply goes out of business, the shipper who hired the brokerage assumes the brokerage’s outstanding debts to carriers. That’s bad news for the shipper, who may have already paid the broker and could get stuck paying the same bill twice—but it’s the law, and it’s designed to protect carriers.

We often collect on failed payments from the brokerage bond and/or the shipment originator who hired that broker. At Bobtail, we file these claims quickly and with no charges to our clients; you did the work, and you deserve to keep the payment.

An Easier Way To Factor Trucking Invoices

The final argument for recourse vs. non-recourse factoring is that you already manage your own risk. Why pay for an insurance policy—and hand over control of your client roster—when you vet your brokers, work with trusted companies, and maintain a proven client base already?

Bobtail is here to provide factoring in the simplest way possible, which means no contracts. That’s also why we don’t charge set-up fees, hold your money in reserve, introduce surprise costs, bill for credit checks, or enforce volume requirements. All you pay is the factoring percentage, and we’ll never tell you who to work with.
Simply download the app, enter load details, upload rate confirmation and a bill of ladings, and watch the funding flow. Ready to experience Bobtail for yourself? Sign up here to start factoring with us today.