Continue your factoring lessons to help your trucking company become financially savvy. 
By Steven Hausman 

Welcome to Factoring 101, your continuing online education in the nuts-and-bolts of factoring. All of our lessons are bite-sized chunks of information you can read and digest in a few minutes. This series is provided as a public service by Advance Business Capital.  

Lesson #2 – Recourse Factoring
Let’s quickly recap what we learned in Lesson #1.  

• A factor is a business that buys a company’s invoices, or its accounts receivable.
• “Factoring” is what factors do, which is pay money for another company’s debts.
• Factoring isn’t lending. A factor doesn’t loan money for collateral. A factor purchases your invoices less a market discount.  You give up a little money—how much depends on the circumstances—to get most of your money right away.

What’s Recourse Factoring?
On to Lesson #2. Factoring is a business that can be found in most industries, but it’s particularly common in freight hauling, and especially for start-ups. There are two basic kinds of factoring: recourse and non-recourse. This lesson will deal with recourse factoring, which is the kind favored by bigger operations with large fleets.

Definition: recourse factoring is the sale/purchase of accounts receivable with the option of legal recourse in case of default.

Factors & Invoices
That’s a little abstract, so let’s illustrate the idea with an example. Say you’ve got a trucking company—“FastFleet”—with about sixty tractors. FastFleet has been in business five years but you’ve always depended on your loads to generate working capital. Lately loads have been unpredictable and FastFleet is running behind on payments, which are incurring penalty fees.

You’ve been eating the fees, but they’re starting to eat you. You can’t go to a bank because FastFleet’s only real collateral is its rigs, which are already financed.

On the other hand, you’ve got an established business with steady customers. You’re not desperate but you could use some help till things pick up. You don’t have the kind of collateral that banks like (the kind they can resell), but you do have money coming in: your invoices. They’re just not coming in on time.

That’s where the factor comes in. Factoring companies like invoices. It’s what they’re set up to do. Therefore your company, FastFleet, contacts a reputable factoring concern, which we’ll call “Crown Factoring.” FastFleet and Crown Factoring sign a recourse contract, standard for most medium-sized truckers. Crown buys FastFleet’s invoices, minus 5% (or whatever the market rate is).

Recourse Factoring Advantages
Not a bad deal, you get working capital, plus you’ve unloaded your accounts receivable chores onto someone else. Crown Factoring assumes the responsibility of billing and collecting FastFleet’s debts.

In fact, Crown now owns FastFleet’s debts because (see Lesson #1) factoring is a sale, not a loan. If somebody doesn’t pay, Crown’s out of luck but FastFleet is in the clear, no liability. Right?

Well, actually no (sorry). Before we get into why, let’s continue the example. Among the invoices Crown bought from FastFleet is a bad apple: “Krazy Karl’s Karnival Rides,” which has folded its tent in the middle of the night and vanished, leaving debts and bad checks all over town.

Invoice Liability
Somebody’s gotten taken for a ride. Now maybe FastFleet should have looked twice at Krazy Karl’s credit score, or maybe Crown should have examined FastFleet’s loads closer. Like lawyers say, that’s immaterial. If Crown’s collection department can’t trace Karl, FastFleet is liable for that invoice: one fold-up Ferris wheel delivered to Marty’s Midway in Nub, Nevada.

Is that fair? Sure. Most sizeable purchases come with a warranty of some kind. By definition, recourse factoring means the factor (that’s Crown) has legal recourse to collect any unpaid debts from the seller (FastFleet).

But what if you don’t want to be liable for your unpaid invoices? In that case, FastFleet and Crown can do a contract for a non-recourse loan. That’s an option, though one not favored by fleet owners. Non-recourse is usually saved for smaller, owner-operator companies. There’s a reason, which we’ll go into next lesson.

Takeaway 
In the meantime, here’s your takeaway: 

• Recourse factoring means the seller (the trucker) is liable for unpaid invoices. 
• Recourse factoring is usually an option for fleet operations.

For many truckers factoring is a good deal, but of course not always. Stick with this course and you’ll learn how to tell good deals from bad, and how to make factoring work for you. See you next class!

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