If you’re an owner-operator or the head of a trucking company, you know how important it is to get paid quickly. At the same time, freight invoice payouts can take weeks or months to roll in, but in the meantime, you need to buy fuel, pay for maintenance and afford payroll. You may have even heard that something called “freight factoring” or “invoice factoring” is the solution without knowing what that actually means. If that’s the case, keep reading to learn all about the process and why a freight factoring specialist might work wonders for your cash flow.
What does a freight factoring specialist do?
Factoring companies and specialists make it possible to get paid immediately for outstanding invoices. This setup makes working capital available right away so that companies can cover expenses and improve their accounts receivable turnover rates.
What services does a freight factoring specialist provide?
The first and most important service is invoice factoring. There may be other features and services, such as fuel card programs, cost plus programs that spread fuel charges across all clients, and credit reports for all possible customers. Some factoring companies may also finance freight brokers.
How much do freight factoring specialists charge?
In general, you can expect to be charged between 1% and 5% of the freight invoice, though being charged as much as 9% isn’t unheard of. This figure can vary based on how many invoices you need to factor in how much each invoice is for, the customer’s credit history, and whether or not you decide on non-recourse vs recourse factoring.
Recourse factoring means that if the factoring company can’t collect on the invoice, you’re responsible for the balance. This might not sound like a good deal, but recourse factoring is usually the cheaper option, and qualifying is easier because you’re the one taking on the risks. Of course, you could face collections if you can’t buy back the invoice, so keep that in mind.
Non-recourse factoring, on the other hand, is when the factoring specialist takes responsibility for the debt. That way, if the customer ends up not paying, you will still get your money. This approach is a more expensive option, and there are limits to the service.
What is a good factoring rate in trucking?
The lower the percentage, the better. As mentioned, typical charges are between 1% and 5%. Some factoring specialists use flat rates while others use variable rates.
For example, your specialist might charge 1% for invoices paid within 15 days. However, they may charge 2% from 16 to 30 days, followed by 3% after 31 days. Remember that you are getting a good rate if you’re consistently seeing less than 5% charged.
Do freight brokers use factoring specialists?
They can, but only if they need factoring, too. Even then, not every specialist will handle freight brokers. If a specialist does deal with freight brokers, they may limit maximum advances to 90% or less. Typically, these factoring specialists will pay the broker’s carriers themselves, meaning there won’t be any liens on the freight bill.
Example of factoring specialist services
The way it works is pretty simple. A customer contacts you to have an item shipped. Your freight factoring specialist runs a credit check to ensure their item qualifies.
Once you deliver the item, your invoice and other paperwork get sent to the specialist, who purchases your invoice from you. They then wait on the payment from the customer.
Again, this process involves a fee. That said, for companies and owner-operators that can’t wait around for payment, freight factoring could be a lifesaver.
How to choose a freight factoring specialist
The most important thing to do when looking for a specialist is to research your options. What are the services you might need? Who’s reliable and stable? It’s worth doing a little digging to find the answers to these questions.
Time in business
Find a factoring company that has been in business for five or more years. There are plenty of fly-by-night operations, but the competitive nature of the industry tends to weed out weaker companies.
The factoring specialist you end up choosing should be flexible. Make sure they are able to adapt to the changes the industry experiences. Look into the companies they work with, such as high-profile 3PLs and other businesses that typically need to perform many shipping duties.
Vast transportation knowledge
When you’re searching for the right specialist, ask questions to make sure the companies you’re considering are truly transportation specialists. Ask about industry-specific terms, who their competitors are, the laws or regulations governing them and the paperwork involved in the factoring process. If they can’t answer basic questions, take your business elsewhere.
Financing for freight brokers
If you’re a freight broker who needs factoring, do your research to make sure that the factoring company you want to use can provide financing in the first place. Look for the highest maximum advance rates as well.
Unlimited credit reports
Running credit reports on potential clients is paramount, but it’s not a process you want to pay for if you don’t have to. Find out whether the factoring entity provides unlimited credit reports. It’s not necessarily a deal breaker if the rest of their services are excellent and they don’t have unlimited reports, but it could save you money if they do.
Check if the factoring company you want to use offers fuel cards. They might provide fuel discounts, which can add up fast. Some companies have cost plus programs that spread fuel purchases across every client. You may even be able to get fuel advances so that when you pick up a shipment, you will receive funding to cover the fuel costs.
Do your freight factoring due diligence
If cash flow is a problem for you and your customers seem to sit on their invoices for a while, you might be a candidate for freight factoring. But you have to know how to find the right specialist first. By taking into account the information above, you’ll be well on your way to finding the best fit for your business in no time.
Factoring can be worth it for trucking companies, particularly smaller ones or independent operators, as it provides immediate cash flow by selling their invoices to a third party, thus enabling them to cover costs like fuel, maintenance, and payroll without waiting for payment from clients.
Factoring carries some risk, including the potential for high fees, the requirement for long-term contracts in some cases, and the potential for a factoring company to assume control of the collection process, which can affect customer relationships.
A major disadvantage of factoring is the cost, as the fees charged by factoring companies can significantly reduce a company’s profits. Additionally, it may not address underlying issues with cash flow management, and a reliance on factoring can indicate that a business might benefit from improved financial management or business practices.
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