If you are in the trucking industry, you have probably heard of “freight factoring”. Freight factoring is such a useful tool for small and medium sized businesses. The benefits of working with a factoring company (if you choose the right one) can help your business boom.
What is Freight Factoring?
Freight factoring is the action of selling your business’ outstanding invoices to a factoring company for cash. This service is a tremendous help to trucking companies who are just getting started and don’t have capital to cover the cost of their next load until they receive full payment for their first load. Instead of having to wait up to 90 days to get paid, a factoring company will pay you usually within 24 hours. Factoring a load allows the owner/operator to continue accepting loads and therefore, growing his or her business.
What Does a Factoring Company do?
Factoring may sound like a loan, but it isn’t at all. The factoring company buys your invoices and takes a small cut of the invoice. The factoring company takes on the risk of the debt and handles all the billing and invoicing on the collections.
How does this work? The owner/operator submits the bill of lading and rate confirmation to the factoring company. Once approved, the factoring company will deposit the money into your account via ACH, wire or a fuel card. Most factoring companies have an online portal or app where you can submit these documents making the process even easier!
Can I Factor Invoices with Bad Credit? Usually, the owner/operator does NOT need a credit check. The credit check is performed on the brokerage. Therefore, anyone can factor in their invoices, even if you have bad credit.
Besides Freight, What Else Can be Factored?
Factoring does not only apply to freight and logistics. There are numerous industries that use factoring services including staffing, oil & gas, manufacturing, government contracting, healthcare, and construction.
Difference Between Recourse and Non-Recourse Factoring
What kind of factoring is best? Recourse factoring means your trucking company is responsible for a situation where the shipper or broker doesn’t pay on time or at all. Since in this agreement you are sharing the risk, a recourse factoring fee is slightly lower. The freight factoring company will provide credit checks on the shippers or brokers that you use to minimize the risk of working with debtors who fail to pay. With a recourse factoring agreement, there is a portion of your funding held in a reserve account until your client pays the factoring company. A recourse agreement is best for established trucking companies who have worked with their clients and know their payment terms. Also, it’s good for trucking businesses that don’t need back-office assistance. However, billing can be included in the contract if needed.
Non-recourse factoring is a contractual agreement that will protect you from clients that don’t pay on time, or at all. Your freight factoring company would incur the risk if the client doesn’t pay, and you will never be charged back for it. Non-recourse factoring is beneficial for most trucking companies, especially if the company cannot afford to take on the risk of a client not paying or going out of business. The fee is often slightly higher, but worth it to avoid the risk of going out of business. With most non-recourse factoring agreements, you also get additional services like back-office assistance of billing, invoice handling, and collections included in the fee.
Do Your Research
Like anything in life, you get what you pay for with factoring. Every factoring company has pros and cons. Make sure you ask questions about what additional benefits you are entitled to and always read the fine print because you usually have to sign a contract to factor in!
