Have you tried freight factoring to solve your trucking company’s cash flow challenges? This fast and simple financing solution has enabled many freight companies, especially small businesses, to cover their expenses and keep their businesses running. If you are unsure whether it is the right solution for you, this introduction to freight factoring will help you understand how it works and the benefits it offers.
The Cash Flow Challenge in the Trucking Industry
First of all, why would need invoice factoring for trucking in the first place? The short answer is that factoring provides a simple, fast and manageable solution to the cash flow problems that are so common in the industry.
Why Timely Payments Are Critical
One of the ironies of the freight industry is that, while trucking companies need steady cash flow to manage ongoing running costs and overheads, they also tend to offer long payment terms. Consider your own trucking business. It is likely that you need to pay for upgrades to your fleet today, but the money you need to do so is only due in 30 to 60 days’ time. Some businesses can operate in this manner, provided they already have sufficient cash reserves. However, this is not the case for most trucking companies, which is why timely payments are so important.
Common Trucking Financial Hurdles
Freight factoring provides a way to solve some of the most common trucking cash flow challenges. When cash flow is a little sluggish, it makes the efficient running of a freight company very difficult. There are costs, such as fuel, drivers’ wages, and regulatory compliance, that must be paid regularly and promptly. If they are not, there is a high possibility that supply chains might be disrupted - and this is something that neither the trucking company, nor its clients and consignees can afford.
What is Freight Factoring?
Freight factoring is an answer to all these problems. It provides a fast alternative to traditional bank loans, and helps to keep your wheels rolling - all you need are receivable invoices that you can factor.
A Brief Overview of the Concept
Factoring is not the same as a loan. You do not incur any debt and your credit history is not relevant for approval. When you factor invoices, you do not use a line of credit and you do not incur any debt. It is a means of unlocking the cash you already have bound up in your accounts receivable - all those invoices that are awaiting payment in the next month or more. Essentially, a factoring company buys these from you and advances a percentage of their value to you upfront. In most cases, you will receive your payment within hours of sending your invoices. This enables you to solve or even prevent your ongoing cash flow issues. The factoring company usually also takes on the duty of collecting payment from your clients. Once they receive payment, they transfer the remainder of the total to you after deducting a small factoring fee.
Key Terms and Definitions
Some of the key freight factoring terms to know include the following:
- Factor/Factoring company: A business that provides factoring services, as outlined above.
- Advance: The amount that the factoring company pays to the client upon receipt of their invoices.
- Advance rate: The percentage of the invoice total that will be advanced to the client. This usually ranges from 70% to 95%.
- 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 a client’s portfolio.
- Factoring fee: The fee the factor charges to finance a client’s invoices. It is usually calculated as a small percentage of the invoice total.
- Recourse/ Non-recourse factoring: There are two kinds of factoring. With recourse factoring, the client is responsible for buying back an invoice that one of their customers has not paid. With non-recourse factoring, the factoring company takes on this risk.
Getting Started with Freight Factoring
Unlike a bank loan, it is easy to qualify for, and get started with invoice factoring. All you need to do is fill out an online application form. We will then consider your company’s vital information and conduct credit checks on your customers. Once that is done, you can send us your invoices for verification. If we are happy with the invoice and your client’s payment history, we will advance a percentage of the total to you immediately. We then wait to collect payment from your customer.
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.
