In Gainesville, Georgia, trucking companies know all too well the challenges of maintaining healthy cash flow.
Trucking can sometimes be seasonal. It can have its periods of ups and downs. It can take a long time to collect money on jobs that have been completed or agreed to.
And all of this can create a financial challenge to freight companies that need to weigh accepting jobs to boost sales and revenue with the need to bring in actual cash to pay the bills.
When freight companies need capital to help them, one popular financing option they might turn to is freight factoring. But, what exactly is it and how does it work?
Let’s take a closer look at freight factoring to answer all the main questions.
What are Freight Factors?
Freight factors are companies that serve as financial intermediaries between two companies — a manufacturer or shipper of goods and the freight company that will be transporting those goods.
The factor company speeds up invoice processing, giving transportation companies quick access to the capital they need without having to put in the time and effort to collect on what they’re owed.
There are many benefits a factoring company can bring to the table for both freight companies and customers, which we’ll dive into in a bit.
How Does Freight Factoring Work?
There are a few steps to working with a factoring company. First, a freight company will agree to ship a customer’s goods from Point A to Point B. Then, the freight company submits the load to the factoring company to see if the customer and the load would qualify for the factoring services they provide.
Assuming the load does qualify, the freight company will send the factoring company the invoice and any supplementary paperwork once the load has been delivered.
The factoring company will purchase the invoice, and send the freight company the money for the outstanding invoice. The factor will take a percentage out of the total invoice for their services, which is how they make money in the arrangement.
Finally, the factor is tasked with collecting payment from that particular customer.
How Do Factoring Companies Assess Risk?
Like any lender, factoring companies will assess risk in multiple ways to protect their investment. After all, they are essentially lending freight companies a percentage of their outstanding invoices and also take on the responsibility of collecting the money due from the customers. If the factor isn’t able to collect that money from the customer, they might suffer a big financial loss.
As such, factoring companies typically will weigh things such as the freight company’s customer base, how many days on average their customers take to pay, what your volume invoice is like on a monthly basis, and how much capital you need advanced from your invoice.
They will base things such as their rate and how much they’re willing to advance when based on this risk assessment.
What are the Benefits of Freight Invoice Factoring?
There are many benefits to all parties involved in freight invoice factoring. It isn’t just the freight company that will benefit. Here is a brief description of the main benefits involved.
For Getting Paid
For freight companies, the obvious benefit to freight invoice factoring is the quick access to capital. Instead of having to wait weeks if not months to collect on their outstanding invoices, they can get access to a percentage of the invoice typically only days after a load is delivered.
Even if they have to pay a 15% fee on every invoice for the quick access to cash, it could be worth it to freight companies who always need to get their hands on working capital.
What’s more, freight invoice factoring takes an entire aspect of their business operations out of their hands — collections. When companies use freight invoice factoring, they don’t have to hire employees to collect on outstanding invoices, or ask other employees to take time away from other tasks to do it. Instead, a professional company handles that for them.
Customers who need goods shipped also benefit from freight invoice factoring. Many customers that have big loads that are expensive to ship will have to deal with freight companies hounding them to pay their invoice.
Not only can this be annoying, it can also stunt their business. Some customers may have trouble finding a freight company that is willing to do the job without a significant down payment on the invoice.
With freight invoice factoring, the customer gets to deal with an experienced financial company that can afford to wait longer to collect on the invoice. This, in turn, provides the customer will improved cashflow as well.
Difference Between Recourse and Non-Recourse Freight Factoring
The most common type of freight factoring is known as recourse factoring. Under this arrangement if the factoring company isn’t able to collect payment from a customer, then the freight company must purchase back those invoices. In the end, the freight company would then be responsible to collect non-payment.
Non-recourse factoring works the opposite way. If a customer doesn’t pay in this situation, the freight company might not be responsible for buying back the unpaid invoices. There are some typical exceptions to this type of factoring, including one that only limits non-recourse contracts to situations where a customer declares bankruptcy.
Factoring companies that offer non-recourse factoring typically charge a higher rate for these services, since they’re assuming greater risk.
Freight Factoring Terms, Rates and Qualifications
There are some common terms, rates and qualifications you should be familiar with if you’re considering freight factoring.
First, know what type of contract you’re agreeing to — whether it be recourse or non-recourse factoring (as described above). Second, understand your responsibilities as the freight company and what the responsibilities of the factoring company are. This is extremely important, as it will help you determine whether the rate you pay for their services is worth it in the end.
Finally, understand when you will get paid, how you will get paid and how the factoring company will interact with your customers. Ultimately, they are your customers, so you want to make sure the factoring company treats them with respect when they’re trying to collect.
Each factoring company will charge different rates for their services. Some may only be willing to advance 85% to 95% of the total load invoice once it’s delivered. This is based on a number of items, as mentioned above.
When you apply for factoring, the factoring company will extend you an offer that has contract terms such as your maximum credit line, which sets the total amount of credit they’re willing to extend you. This will determine how big you can grow with the company.
They’ll also lay out other fees involved, such as those for certain types of financial transactions or aging of your outstanding invoices.
The factoring company will take into consideration many items when deciding whether to approve you for financing, and how much they’re willing to extend. Your company’s credit history might play a factor in this process, but so, too, will your business history as well as the loads you are delivering and the customers you’re delivering them for.