If you work in the trucking industry, it’s likely that you’ve heard the term “freight factoring” mentioned. Owner-operators and trucking firms can now avoid protracted payment delays on invoices thanks to freight factoring. However, many drivers and business owners are unaware of its exact nature or functioning.
By bringing an influx of working capital into the business, freight factoring has the potential to financially benefit many parties involved in the trucking industry. Owner-operators in particular, who frequently spend as much time managing their finances as they do driving, should bear this in mind. To help you decide if a transportation factoring company is the best choice for your business, our comprehensive guide to freight factoring offers an inside look and expert advice. We’ll give you the direction you need to get going, covering everything from the process’ workings to typical business inquiries!
Freight Factoring: What Is It?
It’s crucial to first comprehend freight factoring in the trucking sector. The fundamentals of the freight industry are fairly straightforward: In exchange for your services, the shipper or a broker pays you to pick up the goods at one location and deliver them to another. Your profit is the sum of the money you are paid less the costs associated with delivering the cargo.
However, this is not typically how payments are made. It typically takes 40 days for businesses to pay invoices, but some can take up to 90 days. Waiting that long for the money you require for living and business expenses is inconvenient.
With freight factoring, you can get paid as soon as the invoice is received. You contract with a freight factoring business outside of your organization to handle the collection process. They purchase the invoice from you at a slightly discounted price, allowing you to concentrate on moving loads rather than worrying about getting paid. This enables you to pay for weekly or monthly expenses without using a credit card, getting a loan, or spending down your savings.
What Is The Process Of Freight Factoring?
Quick payment can be crucial for success in the trucking sector. With factoring, you can send invoices to your factoring company for same-day processing and receive payment on the invoice amount much more quickly rather than waiting several weeks. This provides you with the funding you require to keep your business operating. Like all commercial transactions, freight factoring is successful because everyone involved is motivated to do so.
The freight company or owner-operator has an incentive to pay you right away rather than make you wait a long time. When a freight factoring company purchases an invoice from a driver, their incentive is the percentage they charge or “leave out,” which translates to profit when they later collect from the customer. The final incentive for the customer is that they get to work with a business that has the financial security to hold off on a payout rather than a small freight company that is literally on life support. See more about What is Hot Shot Trucking?
The Function Of A Freight Factoring Company
Both the fundamental service that a factoring company provides to truckers and the particular services that make them stand out from the competition are crucial to understanding. Our top-notch factoring services at TAFS work to buy your invoices from you and get you paid upfront, even in as little as one hour. In addition to factoring, TAFS offers clients premium services that will keep you ahead of the competition in your industry. Let’s examine the details of the invoice factoring procedure:
1. A needs to be delivered from A to B for a business (customer).
2. They hire you to deliver it, and you check the customer’s load’s credit with your factoring business to see if it meets the requirements for their services.
3. Upon delivery, if applicable, you send your factoring company the invoice and all relevant paperwork for the load. (Online or through a mobile application, paperwork is typically submitted.)
4. You or your business will be paid after they pay that invoice.
5. After that, the factoring business gets paid by the client.
There may be a few additional steps in this process, depending on a variety of circumstances. Consider applying for factoring as you would apply for health insurance or a credit card for the purposes of this discussion. Due to the fact that businesses and owner-operators apply to factoring companies rather than simply hiring them, this is the case. And ultimately, the terms of the factoring agreement will depend on the nature of this application.
What Are The Advantages Of Factoring Freight Invoices?
The use of freight factoring has a few notable advantages. Once your submitted invoice is accepted, the first option is same-day pay (in most cases).
Get Same-day Pay
This enables small or new businesses to have consistent cash flow and operating capital. Furthermore, it assists big businesses in maintaining a healthy cash flow.
Qualify Brokers
Another advantage is that factoring companies frequently qualify brokers for you, running credit checks to ensure brokers are trustworthy. Freight factoring can be helpful if you lack the time or resources to complete this.
Eliminate The Burden Of Accounting
For a small fee, you effectively contract out your accounts receivables department to another business. This relieves you of much of the accounting responsibility so you can concentrate on other duties like ownership, management, human resources, and more. Additionally, you won’t have to use up valuable time calling customers for payment and looking for unpaid invoices. Because they must collect the money they are now owed, the factoring company handles the majority of the follow-up on your behalf.
Don’t Stress About Getting Paid
For both small and large companies, whether they are well-established or just getting started, freight invoice factoring can be a practical and advantageous benefit. It relieves you of a lot of burdens, worries, and laborious tasks.
What’s The Difference Between Recourse And Non-Recourse Freight Factoring?
Recourse factoring vs. before we discuss the specifics. non-recourse freight factoring, it’s important to understand recourse. If your customer doesn’t pay on time, or worse, doesn’t pay at all, the freight factoring provider may be able to collect from you under a clause known as recourse.
Clauses are similar for all factoring companies. Non-recourse freight factoring is frequently ambiguous. Non-recourse means that the factoring company won’t try to collect from you if your customer files for bankruptcy or closes shop between the time you submit your invoice and the date they are expected to pay the company. This situation is unusual. Non-recourse does not preclude the provider from seeking payment from you in the event that your client defaults on their obligations. It only protects you in the scenario mentioned above.
In general, factoring companies profit by assuming the risk of delayed payment in exchange for a fee. The factoring company will “recourse” to you if your customer doesn’t pay on time. In other words, until the business pays, they will collect from you. You should read and comprehend the recourse clause in the contract before you sign it because it is present in all factoring companies’ contracts in some form.
How Do Factoring Companies Evaluate Risk?
In the event that your customer does not pay, factoring companies assume the risk of unpaid invoices and/or difficulty in recouping their losses from you. Before approving you, they consider the following factors:
- What is the status of your credit? Although this problem is not as significant as some others, it is still important.
- Do you have creditworthy customers? The reliability of your billable customers is more significant than your own credit score. They’re supposed to pay their bills on time. For this reason, factoring companies frequently request approval from brokers or clients before factoring in your invoices.
- The invoices are valid? Factoring companies want to ensure that each invoice they process is authentic, even though fraud in this area is uncommon.
- Have you got a varied group of clients? Your invoices are at greater risk if you only use one or two brokers than if you have a larger customer base.
- Operating your business on a daily basis is difficult due to a lack of cash flow.
- Is your ability to make on-time bill payments hampered by slow-paying clients?
- Have you performed credit checks to ensure a broker will pay before you accept a load?
- Do collection calls consume time that could be used for other purposes?
Freight factoring might be a great option for you if you indicated yes to any of these questions or want a better way to manage invoices.
How To Choose The Right Factoring Company?
You should provide them with some information about your company when searching for a freight factoring firm. They will investigate your background and prior actions before making you an offer. Make sure you comprehend the terms of the offer by carefully reading it.
Pay close attention to the following:
- Speed of payment. How quickly and under what conditions you will be paid?
- Borrowing capacity. The amount of money you can “borrow” against your unpaid invoices at any given time is limited by a maximum credit line or factoring facility.
- Program types. Do they provide recourse, non-recourse options, or a combination of both?
- percentages of advancement. Depending on the terms of the agreement, you may receive all of the payout money or just a portion while the factoring company holds back some.
- Aged invoices. A few factoring businesses charge aging fees, which increase the longer an invoice is unpaid. Additionally, you should look up clearance days, which specify how long it takes for checks to clear. You will also be responsible for paying aging fees for the additional 10 days that pass before payment is deemed complete if the clearance day is 10 days.
- Contract termination. The length of the freight factoring agreement will be agreed upon. You must give notice of termination before the deal’s end date. Additionally, you should be aware of the repercussions of terminating a contract while the factoring company is still owed money for outstanding invoices.
- Additional fees. Some freight factoring businesses impose extra charges, including per-transaction fees, setup costs, administrative costs, and additional charges for same-day pay. Early termination may also be subject to sanctions.
Conclusion
To help owner-operators like you maximize their cash flow, lower delinquencies, and expand their businesses, the factoring for the transportation sector is a specialized service. Contact us today for a free assessment to learn more about our factoring services for transportation companies.