Freight Factoring Delivers Crucial Benefits to Trucking Companies

Why you need to learn more about how freight factoring works? Trucking company owners and owner-operators are familiar with the challenge of keeping cash flowing through the business. Waiting for payment from one client before you can take on a new client means that you’re left sitting – your trucks aren’t moving. That equates to not turning a profit, and actually costs your business money. It’s a tough position in which to find yourself, but it’s not uncommon in the industry.

Freight factoring can help ensure that you have the liquidity necessary to keep those trucks moving at all times. Of course, you’ll need to know a bit more about freight bill factoring, and the benefits freight factoring companies can offer you. We’ll start with a brief explanation of the process, and then move on from there.

It’s your money, free and clear. When your client pays the invoice, the factoring company delivers the remainder of the balance, and you pay a factoring fee.

While that simplistic explanation does highlight how the process works overall, there’s more you’ll need to understand.

As a financial tool, factoring has been around for centuries. It is a proven solution available to small and mid-size business owners with capital locked up in unpaid invoices, who need liquidity in order to grow their businesses.

Freight factoring specifically is the process of factoring tailored for the unique aspects of the freight/trucking industry including freight broker factoring. It’s a specialised form of factoring that delivers unique benefits that aren’t found with generalist factoring companies.

With that being said, there are many commonalities between freight factoring and general factoring, and we’ll cover some of the most important terms to know prior to signing a contract with a factoring firm.

One of the first and most crucial things to understand in the freight factoring equation is the advance. This is the amount you’re given upfront. It is never 100% of the invoice amount. Usually, it’s between 70% and 90% of the invoice amount, but some trucking factoring companies do offer higher advances.

In most instances, the advance is available to you within 24 to 48 hours through a generalist factoring company. However, specialists in the freight industry understand that even that might be too long for your trucks to be sitting idle. Because of that, many of these specialised firms have started depositing the advance within just a few hours of the invoice being submitted.

The portion of the invoice total that is not delivered in the advance is called the reserve. This is held back against the time that your client pays the invoice amount. Depending on the factoring company you work with, this could be as little as 2% or as much as 30% of the invoice total. The most important consideration here is that the higher the reserve, the lower the advance will be, and the less cash you’ll have to work with in the interim.

All factoring companies charge for their services, but they don’t necessarily charge the same amount. The factoring fee represents the charge for using the factoring company, and it is taken off the top of the reserve (the remaining invoice balance) after your client pays their bill. The average for the industry ranges from 1% to 5% of the invoice total. Obviously, that can grow to be a significant amount of money in the case of a high-value invoice.

Now that we’ve covered those areas, it’s time to consider some of the more pertinent benefits you might see when working with a freight factoring company.

By selling invoices to freight factoring companies, you’re able to realise virtually immediate cash flow, allowing you to meet your financial obligations and take on new jobs. In short, it ensures that you’re able to run a successful freight business.

With the most obvious benefit out of the way, it’s time to look at some of the less visible ones, including those that you will not find with generalist factors.

There are many different factoring companies in Canada, but many of them should be avoided. Vetting potential partners is a crucial component of your due diligence, but you will need to know what areas to base your decision on.

As mentioned, you will never receive 100% of the invoice total when you use freight factoring. At least a small portion of the invoice amount will be used to pay the factoring firm. However, some firms charge reasonable fees, while others tack on hidden charges and additional fees that will quickly erode the value of the service.

Scrutinise your contract, verify with your account representative, speak with previous clients – do whatever you must to ensure that you know exactly what is being charged before you sign on with a factoring company.

While having someone else handle your billing and collection actions frees up your time to focus on what you do best, it’s important to realise that the factoring company will be providing customer service to your clients. That means these interactions have the potential to affect your relationship with those clients.

Obviously, it’s essential that you verify that the firm provides outstanding customer service, and does not practice predatory collection techniques. A single rude experience could be enough to cost you a client forever.

While some factoring companies will let you sell the invoices that you choose, others have minimum volume requirements. When you sign a contract with this type of company, you must meet the volume requirement, even if it’s for a client that pays on time.

That actually costs you money in the long run, as you’re paying factoring fees that you needn’t. It actually locks you into using the company for all of your invoices until you meet the minimum. If you’re a smaller trucking company or a single owner-operator, that could be a significant number of invoices.

There are two broad “types” of factoring – recourse and nonrecourse. Of the two, recourse factoring is the cheaper and more widely available. However, it puts you in a tight spot. In this situation, you are responsible for repaying the advance if your client doesn’t pay, even though the freight factoring company approved them and ran a credit check on the client ahead of time. That can be virtually impossible to do if the advance has already been spent.

Nonrecourse factoring is more expensive in terms of fees, but you have the protection of knowing that the factoring company is responsible if your client does not pay. Ideally, you’ll find a freight factoring firm that offers both recourse and nonrecourse options to fit your needs and the level of protection you require.

These are just a few of the elements you’ll need to consider prior to choosing a freight factoring partner. Other important elements include the company’s overall reputation with past clients, how available they are when you need questions answered, whether they provide free load board access, whether account access is available 24 hours per day, and more. It can be frustrating to research and compare each company, but it is absolutely crucial that you do.

Finding the right freight factoring company can be a full-time job in its own right, and most trucking company owners lack the time required. We can help. We specialise in providing our clients with the vital service of vetting and then connecting them with the right factoring company for their specific needs. We invite you to take advantage of the free consultation with one of our factoring specialists and start the process of freeing up capital in your business.