Business Credit, Cash Flow

Assigning Risk in Transportation Funding: Recourse vs. Non-Recourse Factoring

Posted by Factor Funding Staff on March 9, 2022

assigning risk transportation funding

Transportation factoring is a financing method where you sell your invoices to a factoring company in exchange for an advance on the face value. You receive most of your payment immediately, and the factoring company takes charge of collections. Once the invoice is paid, you receive the balance minus a small fee. 

How can a company take on this liability and still help you maintain a steady cash flow? By assigning risk in various ways. 

Types of Factoring

Factoring companies typically offer two types of factoring — recourse and non-recourse. Recourse is the term used to indicate whether the factor has the recourse to go back to the transportation company and require it to buy back an invoice in default.

Non-recourse factoring indicates the factor is responsible for unpaid, defaulted invoices. However, the factor is only responsible in certain circumstances. To cover the risk, factors generally charge higher fees.

Recourse factoring means the transportation company is responsible for the invoice, even though the factor performs collection duties. If the customer defaults on the invoice and the factor expends reasonable effort to collect, then the transportation company must buy back the invoice, returning the advance the factor paid.

Recourse factoring lowers the risk for the factor, so you can pay lower fees for the service.

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Recourse Factoring 

If you agree to recourse factoring, you are responsible for paying the factor back if a customer does not pay their invoice. In essence, you buy the invoice back from the factor to either attempt to collect yourself or take the loss.

Recourse factoring is the most commonly used form of factoring and has several advantages:

  • It’s less expensive for the transportation company because the factor charges lower fees, sometimes as low as 1%.
  • It is not a loan and doesn't appear as a debt on your ledger.
  • You don’t handle collections unless the customer doesn’t pay the factor.

There are some disadvantages, though:

  • If the customer doesn’t pay, you must buy back the invoice using cash on hand.
  • You perform any additional collections activity.
  • The buyback can affect your cash flow depending on your situation and reserves.
  • If you can’t pay the factor for the invoice, you might wind up in collections yourself, to the detriment of your credit rating.

Recourse factoring is better for transportation companies with reserves to cover the occasional unpaid invoice. It also is an appropriate choice for small companies or owner-operators with reliable customers that usually pay on time.

Non-Recourse Factoring

The term non-recourse is a bit confusing because it doesn’t mean the factor will never require you to buy back an invoice. Much depends on the terms and conditions of your contract. Typically, a factor has no recourse if the customer is in bankruptcy or has gone out of business. In other circumstances, you may be required to pay back the advance and collect on the invoice.

In non-recourse funding, the factor agrees to purchase loads for a flat fee and advances the value of the freight bill minus the fee. Then the factor waits to be paid by your customer. Using non-recourse factoring reduces your risk of nonpayment. You always get paid upfront, even if the customer defaults, and you aren't required to return the advance.

In flat fee factoring, you always know the amount of cash advance you will receive and can take it into account while keeping your books.

Non-recourse factoring has its own set of advantages:

  • You get working capital the same day as you submit the invoice.
  • There are no additional debts for you to handle.
  • Somebody else performs collections and saves you the back-office work.
  • You always know the factoring fee when you sell your invoices.

Of course, there are also some disadvantages:

  • Non-recourse factoring is more expensive than recourse factoring. The typical fee is 3% to 5%.
  • It may be your only protection against a customer’s bankruptcy in many cases.
  • The recourse clause only protects you if the customer declares bankruptcy or goes out of business (or other stipulations as listed in your contract).
  • You pay more in fees but still may have to buy back some invoices.
  • Customers with low credit ratings may not qualify for factoring.

Non-recourse factoring may work for small to midsize transportation businesses that don’t have the deep pockets to pay for more recourse invoices than necessary. 

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How to Choose Between Recourse and Non-Recourse Factoring for Your Transportation Business

Before deciding which form of factoring to choose, ask yourself some questions.

  • How credit-worthy are your customers? Do most of them have good credit?
  • Can you absorb the cost of factoring and still be profitable long-term?
  • Do you need working capital now, or can you wait for invoice payment?
  • How much risk can your company handle?
  • Does the factoring company handle slow payments? How soon will you need to buy back unpaid invoices?
  • What circumstances does non-recourse factoring cover, and how likely are they to occur?
  • Do you want to factor all invoices or just some?

Recourse factoring companies usually have a minimum invoice volume requirement you must meet before you can use their services. Non-recourse companies rarely have volume requirements and can be used as needed. 

Recourse factoring is best if you:

  • Have credit-worthy customers who pay reliably on time and in full
  • Want to pay lower fees and sell invoices at the lowest rates
  • Can easily repurchase invoices if a client defaults
  • Have a stable business with good cash flow

Non-recourse factoring is best if you:

  • Are a new business with little or no credit
  • Do business with customers who have a high risk of nonpayment or are high credit risks
  • Are a sole proprietor who could use some accounts receivable administration assistance

If you’re stuck between the two options, consider asking the factor for advice (making sure the company is trustworthy and actually has your success in mind). Some factors, like Factor Funding, offer both recourse and non-recourse factoring and will help you decide which one will help you the most. 


Q. What is the difference between recourse and non-recourse factoring?

A. In recourse factoring, you are responsible for unpaid invoices. In non-recourse factoring, the factor is responsible for the outstanding invoices in certain circumstances.

Q. Why is non-recourse factoring more expensive than recourse factoring?

A. Factoring companies are taking a higher risk offering non-recourse contracts, so they charge higher fees to mitigate the risk of nonpayment.

Q. What are some other ways factors assign or manage risk?

A. To manage risk, factoring companies: 

    • Do not accept all invoices for factoring 
    • Perform a credit check on invoiced customers before buying an invoice
    • Offer lower rates for high volumes or large customer bases

Q. Are you required to factor all invoices?

A. No. Typically, you can select the invoices to factor, although your contract may stipulate a minimum required volume for factoring.

Q. Do factors offer online service?

A. Yes. Most factors provide a customer portal where you set up an account, submit or create invoices, bills of lading, and other documentation. Payment is via direct deposit (ACH), wire transfer, or fuel card, or another card.

What do you think? Is recourse or non-recourse factoring the best fit for you? Whichever option you choose, transportation factoring can help you grow your business. Contact Factor Funding today to start boosting your cash flow.

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