What is freight factoring? Do you urgently need money for transportation services and the freight bills are unpaid? Is it advantageous to use freight factoring and what are its drawbacks? What are the qualities of the best freight factoring companies?
This is when a business that deals with the transportation of loads sells its invoice to a factoring company. The factoring company takes a percentage of the invoice as their fee and the remaining amount is paid to the carrier. Different companies have different timelines for payment. Cash flow problems can force you to halt your trucking business and this will lead to great losses. A good credit score does not affect your chances of being funded since payment is dependent on the customer’s information. Freight factoring allows your business to get the necessary cash for:
- Paying drivers in advance.
- Repair and maintenance.
Reasons why freight factoring is right for you.
- The patterns of the cash flow don’t affect you.
- You can get unlimited cash and the amount grows with your business.
- Your credit line is not dictated by previous funding.
- Cash is made available to you on the same day.
- Approval depends on customers’ creditworthiness hence bad credit is not an issue.
- Fuel card programs and fuel advances are available.
- You delivered a load for a client who takes some time to pay back. You need money for driver’s pay, fuel, and other expenses but the cash flow is bad. You find a freight factoring company to offer a financial solution.
- You scan, upload and submit your invoice to the factoring company.
- The factoring company receives the invoice and processes it. Depending on the factoring fee charged, the amount deposited in your account varies.
- The factoring company deals with invoicing, billing, and collection of debt from your customers.
Qualities of the best factoring companies.
- Industry knowledge.
They should know how the trucking industry operates and have experience in the management of receivables from companies like yours.
- Quality customer service.
The customer service representatives should have a vast knowledge of the industry and have experience working with companies in the same financial situation.
- Credit analysis and risk assessment.
The best factoring company checks the payment and credit histories of potential customers and monitors the financial strength of current customers. This helps business owners to know the viability and strength of their customers.
- Account receivable management.
The best factoring companies have a specialist on account receivable to contact the customer and ask for payment.
- Communication and reporting.
Communication is important to maintain a good business relationship. The best factoring company should have representatives to:
- answer the phone.
- respond to emails.
- provide reports for online transactions of your accounts.
Check for online reviews and references from clients when searching for the best factoring company.
Types of factoring.
The borrower gets low advance rates, low factoring fees, and takes responsibility in case the client fails to pay the factoring company on time. Your company buys back the invoice.
The factoring fee and advance rates are high and the borrower is not responsible if the customer fails to pay the debt on time. The charges are higher to cover risks.
- You receive funds on the same day.
- The invoice is used as collateral hence bad credit history is not a problem. It is best for a start-up business with limited credit history for seeking funding.
- Cash in hand enables you to grow your business faster. This is because lack of money can make you turn down new business.
- The factoring company collects the debt from customers. This allows the trucking company to continue with the normal business operation without a gap in the cash flow.
- For approval, you must have quality customers.
- The invoice should be payable within 90 days or less.
- The clients are notified of the change in payment address.
- The rates are higher compared to traditional bank loans.
- The costs of future deals increases if the customer fails to pay.
Freight factoring ensures immediate cash flow allowing your business to grow further. This helps you to pay your drivers and repair the truck, meaning the business can go on as usual. Recourse and non-recourse are the two types of factoring. Freight factoring has several advantages and a few drawbacks that you should look into, to know if it’s the right path for your business. It is important to choose the best factoring company by considering the qualities mentioned above.