Freight factoring is an effective way for businesses to improve cash flow while saving time and aggravation. You probably know the stress that comes with an uncollected invoice if you run a trucking or a transportation company. It can be difficult to scale operations and grow your business without access to much needed funds. You need to pay your employees, pay rent, and pay other overheads and business expenses even if your invoices don’t get cleared on time.
Late paying customers and varying payment terms can make it difficult to manage a stable cash flow. This is why many transportation company owners are opting for freight factoring or invoice factoring. There are several benefits to factoring for both carriers and brokers.
This post will explain what freight factoring is in detail and how it can help your business grow.
What Does Freight Factoring Mean?
The process of selling accounts receivables to a factoring company at discounted rates in return for immediate payment is called freight factoring. Trucking industry has long payment terms. Sometimes, a client may demand as many as 90 days to clear invoices. It can be difficult for you to keep up with operations with such terms. When you factor invoices, the factoring company becomes responsible for the collection and waits instead of you for the bills to become due.
Your factoring company shall collect the payments on your behalf and pay the remaining balance amount to you. Factoring has become one of the more popular ways for trucking companies to raise cash and improve their cash flow while carrying out operations. This is especially true for smaller and newer carriers that may already be under debt for covering their start-up overheads and operating costs.
Freight factoring goes a long way in eliminating the stress and wait that comes with long payment durations. You get to keep your trucks rolling and carrying loads with the instant advance payment you receive from factoring partners.
Costs Associated With Freight Factoring
The only cost you will be required to bear is the small fee that your factoring partner deducts as a discount from your invoices. This is also called a factor fee and is usually taken out of the advance. Rates may vary depending on the company, but tend to be based on the following factors:
- Monthly invoice volume
- Average monthly invoice total
- Time taken by customer to clear dues
Factoring company will also take into account the creditworthiness of your clients.
Types of Freight Factoring
There are two options when it comes to freight factoring – recourse and non-recourse. Recourse factoring is more popular among the two. In this, the factoring partner will pay you the advance, but you are still responsible for the invoices. If a client defaults on the payment, you are responsible for paying the amount to the factoring partner or offering other invoices instead.
Factor rates for recourse factoring are more competitive since you essentially share the risk with the factoring company. The funding partner assumes the entire risk in non-recourse factoring or as specified in the agreement. This is why factoring fees tend to be higher in non-recourse factoring.
Benefits of Freight Factoring
Flexible Payments and Applications
Majority of trucking businesses don’t want to work with customers that have long or delayed payment terms. This causes them to lose potential business. By working with a freight factoring company that accepts invoices with 60 or 90 days, you can increase your business share. Now, you don’t have to turn down customers anymore.
Invoice factoring is way faster than broker payments. Most brokers pay every 45 days, while others will make you wait only 30 days. However, with factoring companies you can get paid within 24 – 48 hours depending on the terms of agreement. In addition, there is increased flexibility on the application of funds. You don’t have any lender breathing down your neck supervising where the money is being paid.
You can use it towards business growth, past dues, acquiring new rigs or other things that are convenient to you.
Keep Your Debt Share Constant
Freight factoring does not increase your debt share. You are not taking up a loan. Instead, you are selling your invoices at a discount to get quick cash right away. This cash can help you scale operations and make more money in the long run. When you factor invoices, you get an advance. You don’t need to worry about making monthly payments or keep track of debt.
You can enjoy immediate cash by selling your invoices to a factoring company at a discount. This way you get the working capital you need without increasing the debt side of your balance sheet. This also allows you to leave your credit options untapped for a rainy day.
Instant Cash Payments
Traditional lending options take time. Sometimes, in the throes of day-to-day operations, you may not have that kind of time. For instance, your fleet may require maintenance that requires immediate capital. Any trucking company owner knows that any day a truck remains idle is good money lost. Banks require a lot of paperwork. And, this is after they find you eligible for a loan. You may need to meet their specific requirements to qualify, which can take weeks.
With freight factoring, you never have to wait to get paid. Most factoring companies understand the nature of transportation industry and offer quick advance payments. You may get the cash you need within 24 – 48 hours. This way you can maintain a robust cash flow and never be out of cash to pay salaries, repair equipment, and get gas among other things. Without freight factoring, you may be looking at charging these expenses to high-interest options, such as credit cards.
It is important to have a steady and consistent cash stream in any industry. There can always be surprises, like fuel spikes or emergency truck repairs. You also want some extra cash lying around in case your business booms and you need to hire additional rig or staff. Loans can take a long time to fund these emergencies.
Truck factoring can save you from the stress of waiting for your customer to pay. You shouldn’t have to wait for something that you worked hard to earn. With less paperwork and far fewer requirements, you can get the cash you need almost instantly.
Focus on Business Growth
You need money to make money in this world. Waiting for capital could essentially prevent your business from growing. You may need to let well-paying opportunities slip by because you don’t have the necessary working capital. You can easily pay your expenses and undertake more loads with increased cash flow.
This will help you make more money, which can be used to invest in new trucks, additional drivers, and additional loads. You could essentially scale your operations make your business grow faster than you realized possible. Freight factoring offers the necessary means to acquire almost instant cash that can help you take on more customers.
The best part about freight factoring is that the funds you receive can be applied in any way you want. You can use it towards pressing cash needs and apply the remainder to grow your business. This can be hiring more drivers, purchasing new vehicles or anything else that you think will help.
Free Up Resources
Most factoring companies offer value-added services. For instance, they may assume the responsibility for your accounts receivables. These services can help you free up necessary resources that may be otherwise spent on collecting customer payments or sending reminders.
They may also help you create customized plans for maintaining a strong cash flow. By working with an experienced factoring company, you can focus on your business and other important functions.
With invoice factoring you can remove the “what-ifs” out of your day-to-day business operations and focus more on growth. You can revel in the knowledge that you can maintain steady cash flow and have enough capital at all times to cover business costs. Truck factoring is one of the best ways for you to get the money you need in your bank account when you need it.
However, you need to make sure that you sign up with an experienced and reputed factoring company that understands the trucking industry and its various challenges.
Bad Debt Protection
An often overlooked benefit of freight factoring is bad debt protection. Sometimes, in the course of business it may just so happen that a client who owes you money is unable to make the payments due. Non-recourse factoring can protect you if a broker can’t pay on a load or goes out of business. The factoring company will absorb all costs in such a situation while paying you any remaining amount due.
You don’t have to worry about any defaults or bad debts if you have a non-recourse factoring agreement. In fact, you don’t need to worry about bad debts even if you enter a recourse factoring agreement. Most factoring companies extensively check creditworthiness of invoices and clients before undertaking them.