Trucking factoring, also known as freight factoring, is a great way for trucking companies to secure immediate cash flow as they sell their unpaid invoices to a factoring company. You can use this money to pay for operational expenses or other investments without waiting for your customers to pay their invoices.
However, you cannot receive the full value of your invoices until your customers pay. Typically, freight factoring companies only offer between 80% to 95% of the total value of the invoice. Yet, this is a great way to secure earlier payment and eliminate the burden of collecting invoices for your truck company nonetheless. There are many more things that you should know about truck factoring, though. Here are the ins and outs of trucking factoring.
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Improving Your Cash Flow
Among the biggest challenges trucking companies face is waiting for customers to pay their invoices. The payment usually takes between 30 to 90 days. However, this creates a gap in accessing financial resources when needed, and when operational expenses come in, some companies might struggle to manage their finances accordingly.
Yet, with trucking factoring, you can sell your trucking company’s unpaid invoices and receive a significant portion of the invoice value upfront. Now, you won’t have to wait as many weeks as before to receive payment and cover your operational costs. You will receive the invoice money right away, improving your cash flow and providing funds for everything that you need, including fuel costs, wages, and more. You can even use the money to support other investments related to your company. The best part is you won’t have to worry about collecting your customer’s invoice as before, as the factoring company will now hold that responsibility.
Assessment of Customer Creditworthiness
When you collaborate with a truck factoring company, your company and your customer’s creditworthiness will be assessed. This is done to ensure that there are no risks when the factoring company decides to buy your invoices and whether or not your company can pay for any losses if the invoices are not paid.
The factoring company will consider some of your customers’ financial stability, payment history, and credit ratings. In some agreements, such as in recourse or non-recourse factoring, your trucking company might not be financially responsible at all if your customers don’t pay or delay the invoice payment. Yet, in most instances, your company must pay additional fees if there are delays or your customers don’t pay.
Advance Percentage & Factoring Fees
If your company is approved for factoring, you will receive an advance of your invoice value that usually ranges from 80% to 95%. Each factoring company might offer a different advance percentage, yet this depends on various factors such as industry norms, customer creditworthiness, and the factoring agreement.
Factoring companies charge a factoring fee for their services, which is referred to as the discount rate. This fee is deducted from the invoice value and is meant to cover the factoring company’s costs and profit. Factoring fees are calculated as a percentage of the invoice value per 30-day period, ranging from 1% to 5%. You can pay this fee through the implied percentage or a flat fee. Each method comes with its own pros and cons.
Yet, factoring costs accumulate from the day you receive the factoring advance until your customers pay their invoices. You can pay the fees on the day your customers pay their invoices. Factoring fees depend on a wide range of factors, such as the volume of receivables you plan to factor each month, the creditworthiness of your clients, the average size of the invoices factored, and how soon your customers pay their invoices.
Collection of Payment and Processing
Once the factoring company purchases your invoices, it will also assume responsibility for collecting customer payments. Customers need to make payments directly to the factoring company instead of the trucking company and adhere to the payment terms on the invoice.
Your trucking company is relieved of several administrative tasks, such as payment processing, collections, and follow-up, as the factoring company will take care of everything.
The Factoring Agreement: What You Should be Careful About
The agreement between a trucking company and a factoring company is among the most essential elements of truck factoring. This agreement outlines everything, including conditions, rates, terms, and the responsibilities of both parties.
It is essential to read the agreement carefully and understand it. Trucking companies must pay extra attention to termination clauses, minimum volume requirements, and additional fees. Do not sign an agreement if you cannot guarantee the minimum volume requirements, and do not opt for a long-term collaboration if you are unsure of your standings.
Recourse and Non-Recourse Factoring
Factoring companies offer both recourse and non-recourse factoring options. Although not all companies do this, it is important to note that recourse factoring implies that the trucking company is responsible for repurchasing the invoices if their customers fail to pay.
Non-recourse factoring, on the other hand, provides protection to the trucking company as it shifts the credit risk to the factoring company. This means that if your customers do not pay or if there are delays related to their payment for the invoices, your company isn’t affected and won’t have to pay anything to the factoring company. Yet, due to these special benefits, non-recourse factoring almost always involves higher fees.
Flexibility and Scalability
Trucking companies are provided flexibility and scalability by factoring companies. The volume of invoices generated by a trucking company is directly tied to the funding available, and since trucking companies often expand, their factoring arrangements can also be adjusted to accommodate their increased invoicing needs.
Many advantages come with working with a factoring company, but the most important is having access to financing by converting unpaid invoices into immediate cash from a reliable partner. Yet, assessing the factoring agreement’s costs, terms, and conditions is essential for trucking companies looking for support and growth. Speak with a truck service company to learn about factoring and what particularities may benefit your needs and requirements.