The importance of freight factoring in trucking business
The trucking business runs on cash. Without steady cash flow, your company can come to an abrupt halt. Invoice collection, the lifeblood for many companies, can be inconsistent and frustrating.
Brokers are on slow pay and customers are hard to reach; before you know it, your company’s money supply is almost bottomed out. Driver payroll, fuel, and other trucking company expenses need a consistent flow of capital to keep the trucking company running smoothly.
Fortunately, you have options. Factoring sometimes referred to as invoice funding, is a great financial tool for trucking companies that speeds their cash flow.
What is Freight Factoring?
With this service, a factoring company purchases trucking company invoices and then collects payments directly from the freight brokers. Depending on the contract, you may get an immediate payment of 85% to 95% of the invoice value, called an advance, all while speeding up your overall accounting processes.
When the broker pays on the load, the factoring company charges its factoring fee from the remaining 15% or 5 % of the reserved money, and the rest is paid out to you. While you lose a small percentage of the invoice, you gain a steady cash flow and could eliminate or reduce the burden on your accounting team, especially accounts receivables.
Therefore, factoring fees are just another business expense. For a fraction of a per-mile cost, you run your trucking operations with financial stability.
Types of Freight Factoring:
The Big Two Categories – Recourse and Non-Recourse.
While there are countless ways that factoring companies can divide, categorize, and market their services, the trucking industry largely separates factoring into two broad types: recourse and non-recourse.
The first type is recourse. With this category of factoring, the company that purchases the invoice (the “factoring company”) can re-sell the invoice back to you if they are unable to collect payment on a load. Essentially, they have a “recourse” if the invoice is unpaid.
Suppose you sell an invoice worth $10,000 to a factoring company for, say, $9,500. The freight broker that owes the money, however, goes bankrupt and is unable (or unwilling) to pay the debt.
With recourse factoring, you will likely have to purchase the invoice back from the factoring company. In the end, you, not the factoring company, would deal with the unpaid invoice, sending it for freight bill collection.
While you get paid faster, you are still ultimately liable for invoice payment.
With recourse factoring, the factoring company assumes less risk. If they are unable to collect payment from your customer, they are not at risk of losing money. Because there is less risk, they can offer more attractive terms to trucking and shipping companies.
The factoring fees are often lower, and the payout that you get for your invoice is higher.
Fortunately, with the right factoring partner on your side, even full recourse factoring can be highly beneficial.
Ultimately, the factoring company wants you to grow and prosper – the more invoices you sell – the better for everyone, right?
That’s why factoring companies will equip you with the right tools to choose the best brokers to do business with and stay away from those brokers whose credit history is compromised. With the diligent broker credit checks, recourse factoring presents a low risk, all while keeping factoring fees low as well.
With non-recourse, the factoring company essentially takes on the invoice with no (or fewer) recourse options in the event of non-payment.
Let’s assume the same scenario as above. Suppose you sell an invoice worth $10,000 to a factoring company for, say, $9,500. The freight broker that owes the money, however, goes bankrupt and is unable (or unwilling) to pay the debt.
With non-recourse factoring, if the invoice goes unpaid due to the client closing business, the factoring company would take on the loss. They would have no recourse to re-sell the invoice back to you.
With the non-recourse option, the factoring company that purchases your invoice assumes more risk where they might not get paid at all. That’s why non-recourse factoring usually has slightly higher fees.
For example, you may pay 0.5 % more than you would in the case with the full recourse factoring. However, non-recourse factoring is the only 100% guarantee to get paid for the delivered load considering it was delivered on good terms.
You have your peace of mind that even when the broker goes out of business, your accounts receivable will not be affected. At Boston Transportation Solutions, we thoroughly interview the best factoring companies before we recommend them to you.
Recourse or non-recourse factoring, you can rest assured that you are in good hands with our preferred factoring partners – click here for more information.
How to find the right Freight Factoring Service?
You don’t need an advanced accounting or finance degree to understand factoring. But we admit, that selecting the right service can be difficult, especially if you are starting the process for the first time.
Whether you are looking for something simple and straightforward to help with cash flow, or you need a strategic partner to help manage growth, we can help.
We are here to advise on any factoring decisions! In addition, we always go the extra mile and negotiate the best deal for our customers. So, make sure to mention Boston Transportation Solutions!
We have been doing trucking for more than 20 years. So, we know the game. And we want you to be successful in that game just as much as you want it yourself!
Find the Resources You Need for a Successful Trucking Company
From the trucking company registrations and FMCSA compliance to training support and knowledgeable advice from the industry expert, you’ll find everything you need with Boston Transportation Solutions. Factoring or Fuel Cards, MC Registrations or FMCSA Compliance, TMS or Logistics Training – at Boston Transportation Solutions, all your trucking needs are served, all your questions – answered! We’re a nationally renowned company with resources all across the states, so contact our team today – call 331-551-8787! Or check this list of our trusted partners!