Invoice freight factoring is an attractive and fast way of improving the cash flow of your trucking business.
Unfortunately, it comes with risks that you need to be aware of.
1. Less control over invoice factoring payments
By signing up for an invoice factoring agreement, you lose control over a portion of your business by giving away certain financial aspects to a third party.
This happens because by involving the factoring company to collect fund, your business and its customers lose some privacy.
Your business losses control over the collection process and invoice payments.
Because of that, before choosing a factoring company to work with, you should thoroughly research it. Make sure to choose a reputable factoring company with good reviews from its clientele.
2. Hurting your business relationships with customers
The change in the process of collecting payments may cause friction in the relationship between the customer and the business because the invoice factoring company actively involves your customers so that they are fully aware of the transfer of the invoice rights and payment process to a third party.
The reality is that initially many of your customers did not sign up for a third-party influence in business relations.
And considering that the average length of a factoring service contract averages between one and three years, customer relationships may suffer in the long term. That way the long and fixed contracts with the customer can be costly and may offer limited scope for change.
3. Unpaid factoring invoices
The factoring company purchases the invoice from your business on the understanding that your customer is going to pay for the factoring invoice.
The risk for your business comes in when your customer doesn't pay within a specified timeframe and the factoring company has the right to demand from your business the full payment of the invoice plus the service charge for factoring.
There are two types of invoice factoring: recourse and non-recourse.
With recourse factoring, the risk is having to chase the payments from your customer. If your customer doesn't pay, you'll have to accept the loss.
With non-recourse factoring, the risk is the high costs that your business has to pay.
4. Lower profit margins
Factoring fees are more expensive than other forms of financing but it's easier to qualify for.
Invoice factoring fees are typically 1 – 3% of the total invoice value. These higher fees can lower your profit margin for businesses.
5. Long Contract Terms
The risk for your trucking business comes in when you want to pull out your business earlier than stipulated in the factoring agreement.
Many factoring companies lock truckers into contracts with them that may span over the years.
While you’re under contract for a long time with a factoring company, you may not be able to factor in with another provider, take payments directly from shippers, or even choose your clients without approval from the factoring company.
6. Minimum Factoring Requirements
If you are starting your trucking business, this can be risky for you.
To reach an agreement, some factoring companies require clients to factor in a certain number of invoices per month at a certain value.
7. Client restrictions
The next risk comes when the factoring companies may not accept invoices for some of your customers.
These companies run credit checks on every shipper and broker you plan to invoice.
If a broker doesn’t pass the test, the factoring company may not accept their invoices.
That way, they can have influence over which clients are factored in and which are not.
8. Negative perceptions about business from the clients
The next invoice factoring risk comes when the trucking businesses that regularly use factoring companies to fix their cash flow issues are usually stigmatized.
Customers are aware of your factoring agreement. They are notified when the factor takes over, and they pay the lender directly.
Problems between the factoring company and your customers could put a strain on your business relationship with your customers. That’s a risk you take when you send invoices to a factoring company.
Some brokers and shippers perceive these trucking companies as being financially insecure and that may be a reason why they may not want to do business with them.
How to Reduce the Risk of Invoice Factoring
To feel secure in the factoring relation and to reduce the above invoice factoring risks it is recommended to use a trustworthy and reliable factoring company.
Do your thorough research before you sign a contract with them.