To keep the trucking business moving, you need to keep your straight trucks or tractor-trailers on the road.
In the trucking industry, cash flow is everything. That is why freight factoring exist.
The signed proof of delivery paperwork indicates the customer's willingness to pay the trucking company or owner-operator for transporting the cargo.
Unfortunately, receiving the actual payment from the customer may take anywhere from a week to several months.
But you need the money now to keep your trucks moving and keep your business running.
You can’t afford to wait sixty or ninety days to receive payments for that load you delivered last night.
In addition, you have bills coming due, and you still need fuel to deliver your next load, not to mention other costs of maintaining a trucking business.
What do you do in this kind of situation?
Below, find what freight factoring is and how it works.
How does freight factoring work?
Freight factoring allows trucking companies to receive payments they already delivered but for which their client didn't pay yet.
Freight factoring funds allows you to unlock the money you’ve already earned so that you can reinvest them back into your trucking business. This reduces the waiting time between completing a load and getting paid.
This streamlines the cash flow of your trucking company so that you can focus on other aspects of the business.
The trucking business sells, at a discount to a factoring company, its accounts receivables (invoices). Instead, very often, on the same day, the trucking business receives back up to 95% of the total of sold invoices.
From there, the factoring company takes care of collecting payments from your clients.
Freight factoring is not a loan, so trucking companies do not have to worry about taking on debt or paying interest.
Instead, they simply pay a fee for the factoring service, which is typically a percentage of the invoice amount.
Why is freight factoring important?
The standard waiting time until the customer pays the invoice for the transported cargo is between 30 to 60 days.
Since invoice payments are rarely paid immediately, freight factoring becomes a vital tool for the trucking business.
That allows to process payouts to drivers who keep the company's trucks on the road.
Without a service like freight factoring, many trucking companies would be forced to shut their doors.
Freight factoring risks
Before you sign on the “dotted line”, it's wise to run the numbers of and be aware of the potential risks of invoice factoring.
Make sure to ask questions about any parts of the agreement with which you are unsure, such as the factoring rates on a freight invoice.
Here are some potential downsides to using a freight factoring company include:
1. Fees: Freight factoring companies charge a fee for their services, which is typically a percentage of the invoice amount. This fee can add up over time and may reduce the overall profitability of the trucking company.
2. Credit risk: Freight factoring companies advance payment to trucking companies based on the creditworthiness of the trucking company’s customers. If a customer fails to pay, the freight factoring company may not be able to recover the full invoice amount, which could impact the trucking company’s cash flow.
3. Customer relationships: Some trucking companies may be hesitant to use freight factoring because it involves selling their invoices to a third party, which may be perceived as a sign of financial distress. This could potentially damage relationships with customers.
4. Limited control: When a trucking company sells its invoices to a freight factoring company, it loses control over the collection process. This can make it more difficult to resolve disputes or negotiate payment terms with customers.
Understand the difference between recourse and Non-recourse factoring
A recourse or non-recourse type of factoring is usually a clause mentioned in the factoring agreement.
Knowing the difference between recourse and non-recourse factoring may impact how much you will gain or lose from a factoring agreement.
- recourse factoring - this clause means that if the factoring company is unable to collect payment from your customer, you are required to buy back the invoice and collect the payment from your client by yourself or support the loss.
- non-recourse factoring - this option is only true in rare cases and if it appears in a factoring agreement, it's often unclear.
Non-recourse does not mean that the provider will not collect from you if your customer does not pay.
It only covers you in specific situations agreed in the contract.
For example, if your customer declares bankruptcy or goes out of business between the time you submit your invoice and when they are supposed to pay the factoring company, the factoring company will not try to collect from you.
And it usually comes with higher fees.
But, this is a rare scenario.
Almost all factoring companies will recourse you.
Freight Factoring Companies
If you already understand what freight factoring is and you may decide that this is what your trucking business needs, do your research among the best factoring companies and choose the one that suits your needs.