Non-Recourse Factoring: Unlock Financial Freedom
Like any industry that supports a supply chain, commercial trucking is prone to certain risks. Truckers face long hours, on-road hazards, and the constant risk of distracted driving from others on the road. Carriers deal with regulatory compliance, operating costs, driver turnover, and reputation management. These and other obstacles can sometimes create challenging environments for carriers, shippers, and transportation brokers alike.
Trucking organizations, particularly carriers, also face several forms of financial and liability risks. For example, maintenance expenses and cargo damage can inflate costs further than anticipated. To alleviate some of these risks, and improve cash flow and funds access, many carriers turn to a process called invoice factoring.
What is factoring?
Factoring isn’t a concept that’s unique to the trucking industry. It’s a financial transaction where a company sells invoices to a third party, typically at a discounted rate. In return, this intermediary agent provides that company with cash at purchase.
This approach provides the selling company with valuable short-term cash. The purchasing company purchases invoices or accounts payable at less than full price, and sends a cash advance for a set percentage of that invoice to the seller. In some cases where additional funds are held at purchase, the purchaser will release that amount once the seller’s invoices are paid.
Here’s an example from the trucking industry:
Imagine a start-up trucking company that transports goods for various local clients. The company now has multiple trucks and employs a team of four drivers to handle deliveries. However, due to the seasonality of their industry or an unforeseen maintenance cost, the company now faces cash flow challenges. These challenges are made worse by the fact that most of their customers pay invoices on a net-30 or a net-60 basis, leaving the trucking company without viable options for the cash they need.
The trucking company decides to engage with a factoring company as a long term solution to this cash flow gap. Here’s how that process might work for them:
- Invoice collection: The carrier gathers all invoices which have been billed and not yet paid by the customer.
- Invoice submission: The trucking company submits their invoices to the factoring company for verification and payment.
- Cash advance: After verifying the legitimacy of each invoice, usually occurring in the same day, the factoring solutions provider sends a cash advance of a set percentage of each invoice. This percentage is included in the trucking company’s agreement with the factoring provider.
- Customer payment: The trucking company’s customer eventually pays their invoices.
By utilizing invoice factoring, the trucking company unlocked access to the cash they needed for continued operations.
What is non-recourse factoring?
Non-recourse factoring is a type of invoice factoring where the seller, in this case the trucking companies, are not held liable for late or non-payments from their customers, placing that risk and liability on the factoring company offering the service. This is in stark contrast to recourse factoring, where the carrier is responsible for repaying their factor if they are unable to collect payment from the customer.
But unlike recourse factoring, non-recourse factoring shifts the responsibility for those invoices from the selling company to the factoring solutions provider. This means that in the event of non-payment of invoices, the factoring company assumes the majority of the risk. They take the financial loss—not the selling company.
Without the responsibility for unpaid invoices, non-recourse factoring might sound similar to a traditional loan. But unlike loans, non-recourse factoring agreements actually transfer the responsibility for non-payment to the factoring company itself. Non-recourse factoring agreements also have different approval processes, fees, and collateral requirements than traditional loans, allowing companies to access much needed financing and cash flow with little to no underwriting or credit requirements.
How does non-recourse factoring improve trucking operations?
Non-recourse factoring is a low-risk strategy that many carriers use to access cash.
Here are a few notable benefits to non-recourse factoring in trucking:
- Risk mitigation: Factoring companies assume most of the risk of non-payment from a customer. This means that if a customer fails to pay their invoice, carriers are not held liable.
- Improved access to cash: Carriers can sell accounts receivable to factoring providers for a steady cash flow to cover operational expenses like maintenance, fuel, and payroll.
- Sustained core operations: Access to liquid cash allows carriers to sustain normal operations, even in the event of unforeseen maintenance, invoice payment delays, or other expenses.
- Debt-free funding: Factoring is not a loan. You can access cash advances without incurring debt, which is particularly beneficial for carriers with existing loans or balance sheets.
- Outsourced credit management: Factoring companies often handle tasks like credit checks, invoicing, and collections on the broker or shipper on behalf of trucking carriers.
These benefits make non-recourse factoring a particularly attractive option for carriers looking to improve cash flow, reduce risk, and continually scale their business.
Partner spotlight: OTR Solutions
Finding the right partner is an important step for any carrier considering non-recourse factoring. DAT has partnered with OTR Solutions for a unique non-recourse factoring package. OTR allows you to easily book loads and submit invoices to the OTR mobile app, a minutes-long experience that only uses pre-vetted, experienced brokers.
OTR Solutions offers the only true non-recourse factoring program for carriers in the industry. Their easy, instant funding programs get you paid quickly with a flare rate and no hidden fees or volume minimums. They allow you to factor when you want and get paid when you need it.
In as little as 24 hours, carriers can access money they’ve already earned through OTR Solutions. They offer customizable services and 24/7 access to invoice submissions and funding tools, taking over client payment and getting you the money you deserve.
Exploring factoring qualification
Factoring is widely accessible for authorized motor carriers operating over-the-road freight in the spot market. The primary qualification for factoring is straightforward: if you have an invoice with a payment term of net 30 days from a freight broker, you are likely eligible for factoring. This simplicity ensures that nearly all carriers in this segment can utilize factoring to manage cash flow effectively.
Risks and limitations in non-recourse factoring
Like most forms of cash transfer, non-recourse factoring does still come with a few limitations.
Here are a few potential downsides of non-recourse factoring as a cash acquisition method:
- Discount Rates: Non-recourse factoring provides your company with fast access to cash, but you will still pay a discount rate on the invoice total to factoring providers. Discount rates will vary depending on your total volume of invoices.
- Contractual obligations: As a carrier, you might be subject to limitations like invoice volume requirements and term lengths. You might also need to notify your factoring provider a certain number of days before terminating your contract with them. This is not the case with all factoring companies, however. Make sure to ask questions before signing up and reading the factoring agreement before signing.
- Broker Checks: Non-recourse factoring providers take on a significant amount of risk when purchasing invoices as they are liable if payment is never received. To help mitigate these losses, factoring providers ensure the broker or customer’s credit and payment history gives them a reasonable expectation of payment. So 100% of available freight can’t be factored on a non-recourse factoring program, but the vast majority can be.
Non-recourse factoring serves as a valuable tool for accelerating cash access without enduring high interest rates. When used judiciously, it empowers carriers to navigate financial challenges effectively while maintaining operational flexibility and growth potential.
How do I choose a non-recourse factoring provider?
When considering non-recourse factoring solutions, not all providers offer the same level of service, or the same type of non-recourse. While many claim to provide non-recourse options, it’s essential to find a partner that truly protects your business interests. Many factors only assume full risk if your customer files for bankruptcy—meaning you still have to assume the risk in most other scenarios.
Seek out a factoring company that not only prioritizes your needs but also actively manages follow-up and paperwork with your customers, ensuring smooth transactions. Look for a provider that values your partnership, offers transparent fees, and has a proven track record of successfully managing payments from trucking clients. Additionally, opt for a solution that provides seamless online features, with an intuitive invoice submission portal and expedited services to ensure uninterrupted cash flow for your operations.
Lastly, find a company that offers high-quality customer service, with support representatives who personally address your issues.
Put non-recourse factoring to work
Imagine getting paid quickly every time you complete a load, without the usual wait. That’s what non-recourse factoring can do for you. By partnering with a company like OTR Solutions, you can turn your invoices into immediate cash. This quick access to funds means you can keep your trucks rolling, take on new jobs without delay, and grow your bottom line.
Non-recourse factoring isn’t just about fast payments—it also means less risk for you. Your factoring partner takes on the responsibility for any unpaid invoices, so you’re protected against the uncertainty of client payments. This setup lets you focus more on running your business and less on chasing payments.
When choosing a non-recourse factoring provider, consider those who offer low fees and minimal contractual obligations. Look for services that provide 24/7 online access, allowing you to submit invoices and check your financials at your convenience.
In essence, non-recourse factoring offers a smart way for trucking businesses to manage cash flow, reduce risk, and accelerate growth. By evaluating providers like OTR Solutions, you can ensure you’re making an informed decision that supports your company’s financial health and expansion.
Start factoring with DAT and OTR Solutions
Improve cash flow in as little as 24 hours, and greatly reduce risk of invoice non-payment, through non-recourse factoring. DAT has partnered with OTR Solutions, the only true non-recourse factoring program serving the trucking industry, to get carriers paid quickly on a flat rate. Without hidden fees or cash delivery delays, OTR Solutions allows you to submit invoices wherever, whenever—to connect you with the money you’ve already earned.
