Many trucking companies have heard of the benefits of freight factoring, but are unsure how to realize them. How does freight factoring work? This brief guide will help you understand the process, which is a fast and simple one. You will be able to turn your invoices into cash in no time at all.
The Freight Factoring Process Explained
The freight factoring process is really quite simple. It starts with an application, which usually takes the shape of an online form. Once you have filled that out and have been approved, you can start submitting your invoices for funding right away.
From Invoice Submission to Funding
Once your agreement is in place, all you have to do is send your invoices to the factor. Once the factor receives the invoice(s), they will advance a percentage of the total value to you immediately. You will usually receive this payment within 24 hours. The factor then assumes the responsibility of collecting payment from your customers. Once they receive payment, they pay the remaining balance over to you, after collecting a small factoring fee.
The Role of Credit Checks in Freight Factoring
Your factoring company has no interest in your credit score, because they are not collecting payment from you. Factors want to know about your customers’ credit histories. For this reason, before agreeing to factor invoices for you, a factor will first check up on the credit histories of the relevant customers. If your customers have good credit histories, factoring will progress smoothly, but if they have bad credit scores, you may not be able to factor the relevant invoices.
Key Terms in Freight Factoring
There are many important terms to be aware of in the world of invoice factoring, but here are the most important ones you will need to know:
Understanding Your Funding Rates
When entering into a factoring agreement, it is important to understand the rates and fees stipulated in your contract. The funding rates describe the percentages of the total invoice amounts, which will be advanced to you once you have sent your invoices. The factoring fees are what you will have to pay for your factor’s services.
Interpreting Your Factoring Agreement
When reading your factoring agreement, aside from the rates and fees, you will also need to take note of the following key terms:
- Factor/ Factoring company: The financial institution that provides factoring services to you.
- Advance: The amount that the factoring company pays to you upon receipt of your invoices.
- Closing costs: Also known as setup costs.The costs involved in securing a factoring agreement. Not all factoring companies impose these charges.
- Concentration: The maximum amount that a factor will fund for a single customer in your portfolio.
- Recourse/ Non-recourse factoring: There are two kinds of factoring. With recourse factoring, you will be held responsible for buying back an invoice that one of your customers has not paid. With non-recourse factoring, the factoring company takes on this risk.
Overcoming Common Hurdles
To make your factoring agreement work well for you, be careful of the common pitfalls often faced by trucking companies that use this service.
Best Practices for a Smooth Freight Factoring Process
The benefits of freight factoring include:
- Read and understand the fine print of your contract, including fees, rates, payment schedules, and whether you are involved in recourse or non-recourse factoring.
- Make sure that your customers send their payments to the factor, not to you. Your factor has advanced payment to you, so now they, not you, need to receive payment from your customers.
- Vet the factoring company carefully before signing an agreement. Read customer reviews and ask around in the industry. Choose a factor that is reputable.
- Don’t rely too heavily on factoring. Factoring should form part of a broader financial management strategy.
So, how does freight factoring work? We hope we have answered this question adequately. It is really quite simple to generate fast cash injections for your business. FactorTek is a provider of invoice factoring and other financial services based in Miami, FL. For more information on us and our services, feel free to contact us. If this introduction to freight factoring has provided all the information you need to get started, fill out our online application form and start factoring your invoices today.
