As a trucking business owner, manager or owner-operator, you know that back-office work can be time-consuming and tedious. Fortunately, transportation factoring enables you to streamline processes and reduce back-office work so you can focus on growing your company.
This article explores how transportation factoring can benefit your trucking business. You’ll learn what it is, how it works, the pros and cons, and how it can reduce your back-office burden.
What is transportation factoring?
Transportation factoring is a financial arrangement in which trucking companies sell unpaid invoices to a factoring company at a discount. In exchange, the trucking business receives immediate cash instead of having to wait for customer payments.
Funds can be used to meet unanticipated financial needs, or cover operational expenses like fuel, payroll and maintenance. How the money’s spent is up to the trucking business.
How does transportation factoring work?
Transportation factoring is a straightforward process. First, a trucking company delivers goods or services to its customers and generates an invoice. Invoice payment terms typically range from 30 to 90 days.
Instead of waiting for customers to pay, the trucking business sells the invoice to a factoring company, called a “factor.” After verifying the invoice, the factor advances between 70% and 95% of its total to the trucking business. The factor then collects the customer payment when the invoice is due and pays the remaining balance, minus a small fee, to the trucking company.
Example
Let’s say a trucking business delivers a load worth $10,000 to a customer and generates an invoice with payment terms of 30 days. Instead of waiting 30 days for payment, the business sells the invoice to a factor at a discount of 5%.
The factor advances 90% of the invoice amount upfront, which is $9,000, to the trucking company. When the customer pays the invoice after 30 days, the factor collects the full amount of $10,000. Then it pays the remaining balance of $1,000, minus the 5% fee of $500, to the trucking business.
Recourse vs non-recourse factoring
It’s important to note that there are two types of transportation factoring: recourse and non-recourse factoring. In recourse factoring, the trucking company is responsible for repurchasing the invoice from the facto if the customer fails to pay.
On the other hand, in non-recourse factoring, the factor assumes the risk of non-payment, and the trucking company is not liable to repurchase the invoice. However, non-recourse factoring typically comes with higher fees compared to recourse factoring.
Pros and cons of transportation factoring
Like any financial solution, transportation factoring has its pros and cons. Let’s take a look at some of them.
Pros
- Speed – Transportation factoring provides truckers with quick access to cash, which is especially beneficial when unexpected expenses or opportunities pop up. This can help trucking businesses maintain steady cash flow and keep operations running smoothly.
- Easier funding compared to bank loans – Trucking companies with less-than-perfect credit or limited financial history may find it difficult to secure a bank loan. Transportation factoring provides an alternative source of funding that’s based on the creditworthiness of their customers, rather than their own. This makes it easier for trucking companies to obtain financing without needing collateral or extensive documentation.
Cons
- Fees – Transportation factoring fees may vary depending on invoice amounts, creditworthiness of customers and industry risks. The discount rates and additional fees charged by factors can eat into truckers’ profits. It’s important for trucking businesses to carefully weigh the costs of factoring against their benefits.
- Relationship risk – When a factor assumes responsibility for collecting receivables from customers, the quality of the interaction reflects on your business. It’s crucial to choose a reputable factor that aligns with your values and customer service standards.
5 ways transportation factoring reduces back-office work
Along with offering immediate cash flow, transportation factoring can make a sizable dent in a trucking company’s administrative burden. Here are five ways it can help streamline back-office operations:
1. Less time spent chasing receivables
One of the primary responsibilities of transportation factors is to collect payments from customers on behalf of trucking businesses. This includes issuing invoices, following up on overdue payments and handling customer communications related to payments. By outsourcing these tasks to the factor, trucking companies can reduce collections-related back-office workload.
2. Credit risk assessments
Another benefit of transportation factoring is that factors typically assess the creditworthiness of trucking customers before approving factoring services. This can help trucking companies avoid taking on customers with poor credit and reduce the risk of non-payment. Ultimately this saves trucking businesses the trouble of checking customers’ creditworthiness themselves, and prevents drawn-out collections after work is finished.
3. Access to automated administrative solutions
In some cases, banks offering factoring services also provide automated administrative tools to help businesses manage back-office operations more efficiently. Examples include financial reporting tools and digital document repositories. By factoring with a bank that offers traditional financial services, you increase the likelihood of benefitting from extras like these.
4. Overdraft avoidance
If you’ve ever mistakenly overdrawn your account, you know how expensive and time-consuming it can be to clear it up. With fast access to cash needed to cover urgent expenses, you can avoid wasting your precious time and resources.
5. Fewer documentation requirements than traditional financing
Compared to other forms of financing, the documentation required to factor transport invoices is significantly less burdensome. You won’t need to pull together a business plan, monthly financial statements or years of tax returns, for instance. Applying for financing is a lot of work that can be easily avoided by factoring transport invoices.
Reduce your back-office burden with transportation factoring
Transportation factoring can be the ideal solution for trucking businesses looking to reduce their administrative workload while improving cash flow. Just make sure to consider the pros and cons, and evaluate your specific needs before choosing a factor. With a reputable factoring service provider, you’ll be benefiting from improved financial and operational efficiencies in no time.
FAQ
Factoring rates in the trucking industry vary. Considerations include the creditworthiness of customers, volume of invoices factored and specific factoring agreement terms. It’s important for trucking companies to compare financial institutions’ solutions to find the best fit for their needs and situation.
Transportation factoring can be a valuable financial tool for truckers, especially ones struggling with cash flow challenges due to slow-paying customers. Under a factoring agreement, a bank or financial institution can provide fast funding, reduce administrative tasks and help improve cash flow.
A factoring company is a bank or financial institution that provides cash flow solutions to businesses like trucking companies. Called a “factor,” the company purchases outstanding invoices or accounts receivable at a discount.
The factor advances a percentage of the invoice amount to the business upfront and collects the full invoice amount from the business’s customers on the due date. Once the invoice is paid, it remits the remaining balance, minus the factoring fees, to the business.
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