For many truck owners waiting weeks for payment is just not a viable option. The operational costs don’t wait and how do you grow your business without cash? This is where factoring comes into the picture.
Factoring companies will buy your invoices at a discount, paying you for them in as little as 24 hours. With factoring, you can choose which invoices to sell so you only take out as much financing as you need. Let’s take a look at how factoring works.
And when you’re finished, check out the other content in our ‘Finances of factoring’ article series:
- What is a factoring company in trucking and how does it help?
- How freight invoice factoring impacts trucking business finances
- Accounts receivable financing vs factoring
- Can factoring be used for temporary payroll funding?
- Best factoring company for trucking
How does a factoring company work?
So, what do factoring companies do? Factoring is a process where you sell your invoices to a company that collects the money on your behalf. Factoring ensures that you get paid within a short space of time, usually 24 hours. The factoring company owns the invoice and will pursue payment.
You have the benefit of early payment so you can cover the costs of your next load. For their trouble, the factoring company receives a percentage of the invoice value. Many transport companies use factoring to improve cash flow without having to borrow money.
How do I get approved with a factoring company?
When you contact the factoring company for a quote, they’ll ask you a few basic questions about your business. You’ll fill in an application and submit it along with the supporting documents.
The factor will submit your application to their underwriters. The underwriters will evaluate the risk of debtor non-payment. Your own credit rating is not an issue since this is not a loan but the sale of an asset. Once you receive approval, the factoring company will set up an account and you can start transacting.
How fast will a factoring company pay me?
Some factor companies will pay you in as little as 24 hours.
What is a good factoring rate?
Rates are dependent on volume and risk. You will pay less for recourse factoring than for non-recourse factoring, which we will describe below.
Your customers’ creditworthiness and invoice volumes are also important. On average trucking companies pay between 1.2% and 3.5% for 30 days.
Do I need a factoring company for trucking?
Whether you need a factoring company for trucking depends on your available cash and your terms of trade. Trucking companies wait 30 to 90 days for invoice payment.
While you wait, operating costs just keep on coming. If you can wait for payment then you probably don’t need factoring. If you’d like payment in as little as 24 hours, then you need to get in touch with a factoring company.
Recourse vs non-recourse factoring?
Many businesses battle with the problem of unpaid invoices. It affects cash flow and can hinder growth. There is a way around the issue, invoice factoring.
Organizations make use of factoring by transferring the unpaid debt to a third party. In this way, they hope to recover at least some of the debt.
When you sell your invoices to a factoring company for trucking, you can choose between recourse and non-recourse factoring. So, what is the difference?
Recourse factoring
Recourse factoring is the most common form of factoring. The factoring company buys your invoices. If it has not collected the money after an agreed period, the recourse period, you must buy the invoices back.
Non-recourse factoring
When you sell your uncollected debt under a non-recourse factoring agreement, the risk passes to the factoring company. If they fail to collect the invoiced amounts, they lose out.
Example of factoring in trucking
Harry’s Trucking Company is in trouble. Their clients pay for freight deliveries 60 days after receipt of the goods. They have plenty of business but they have no cash to pay for operating expenses such as gas and driver salaries.
Harry’s Trucking can’t get a loan from the bank because it has no collateral. Since Harry’s has plenty of customers, they can use factoring.
The owner contacts a well-known factoring company and sells some of his outstanding invoices. He receives the cash within 24 hours and is able to continue to grow his business.
Things to consider when using a factoring company
Before you go into business with any service provider you must do your due diligence. Consider all the essential elements listed below to ensure that you have a good fit with the factoring company.
Credit
When it comes to payment, your clients’ reliability may have an impact on the amount that you have to pay for factoring. The factoring company will take into account client credit history and their commitment to paying you on time.
Customer service
Find a factoring company with a reputation for great customer service. Look for a 24/7 online service so that you can access your account information whenever you need it.
Volume
The more invoices you generate, the more attractive your business is to the factoring company. The higher the invoice volume the lower the factor rate.
Stability/flexibility
Companies come and go in the factoring industry. For stability, find a factoring company that has been in the factoring business for at least a few years.
Many factoring companies set a minimum requirement for invoicing. If your business is still small, you may have to find a flexible factoring company that will waive the minimum.
Pricing
Factor rates will determine how much of the invoiced value you receive. It is, therefore, important that you shop around and find the best rates for your business. Heavy factoring costs will affect your profit.
Advantages of using a factoring company
We’ve listed the many advantages of using a factoring company below:
- Access to cash: Factoring gives you quick access to cash, allowing you to take on more loads and grow your business.
- Quicker response times: It is easier to access cash through factoring than through traditional lenders.
- Credit benefits: Since factoring isn’t a loan (liability), the accounts receivables on your balance sheet becomes a liquid asset. This can help improve your creditworthiness.
- Flexible funds: You can choose how many invoices to sell to keep your business afloat.
- Time-Saving option: The factoring company does the back-office work for you, eliminating the need for your staff to focus on debt collection.
Disadvantages of using a factoring company
- Factoring costs are often higher than the interest paid on loans.
- Factoring companies may not treat your customers with the same level of care as you would like them to.
- Many factor companies won’t take on the risk of unpaid invoices. You would then have to buy back unpaid invoices after the recourse period, which is usually 90 days.
Grow your trucking business
There’s no need to struggle from one month to the next. Factoring can relieve financial pressure and help you grow your business. Plus, when you decide to factor your invoices, you’re not borrowing money. Rather, you’re selling an asset.
FAQ
The factoring company in trucking is paid by the shipper or the broker who originally owed the invoice. Once the trucking company factors an invoice, the debtor pays the factoring company directly.
Factoring can be worth it for trucking companies, especially smaller operators, as it provides immediate cash flow to cover operational costs. However, the benefits must be weighed against the costs and other factors.
Disadvantages of factoring include potentially high fees, the risk of becoming reliant on it for cash flow, and potential complications with customer relationships if the factoring company handles collections aggressively. Additionally, it doesn’t solve underlying cash flow management issues.
