Freight Invoice Factoring – Whether you’re an owner-operator or you manage a fleet of trucks, you know how difficult it can be to ensure business growth and success. The general rule of thumb is to get as many freight jobs as possible. The more loads you haul, the more profit you turn, right? In theory, yes, but it’s not quite so simple. Slow-to-pay clients can wreak havoc on your profitability, leaving you waiting between loads, without the cash flow needed to take on the next job.
The good news is that freight invoice factoring can help your trucking company succeed. Not sure what freight invoice factoring is, or how factoring works in the first place? Let’s clear things up for you. We’ll begin with a quick look at common challenges experienced by trucking companies, and then highlight how invoice factoring provides not just relief, but the ability to move forward and achieve lasting growth.
Challenges Trucking Companies Face
In the world of trucking, growth is directly related to the number of loads you’re able to haul. However, that’s just one piece of the puzzle. You also need to consider other things, including:
- Truck repairs
- Timely delivery
- Truck maintenance
- Back office duties like billing and collections
- The risk of a slow or non-paying client
These issues are compounded by the fact that most of your clients won’t pay their invoice immediately. It’s become the norm to offer “terms”. For instance, your clients might pay on a 30, 60 or 90-day basis.
While that might be the accepted practice for trucking companies, it does little good for your bottom line, and it can easily lead to significant cash flow problems. Moreover, if you’re not able to keep cash flowing into your business, you’ll be unable to pay for those incidental costs related to running the business.
Ultimately, it could lead to significant headaches, long lag times between loads, or even closing your business in a worst-case scenario. Freight invoice factoring allows you to get around the problem created by clients paying on terms. That brings us to our next topic – what’s involved with invoice factoring.
Understanding Freight Invoice Factoring
Factoring is a common financial tool used around the world. It plays a role in helping businesses within just about every industry imaginable succeed. In the freight industry, it does the same thing and largely works the same way as in any other industry.
In this process, you sell an invoice to a factoring company. Depending on the factoring company, you’ll proceed with either single-payment factoring or two-payment factoring. Both ensure cash flow, but they differ a bit from one another.
Single payment factoring is generally used by small companies (three trucks or fewer). In this situation, you would sell the invoice, and you’d receive an advance of between 95% and 97%. That concludes your relationship. The factoring company makes money by keeping the remaining balance.
In a two-payment situation, you would receive up to 90% of the invoice total as an advance, and the balance less a factoring fee when your client pays.
If factoring sounds good, but you’re not quite clear no why it’s an important tool for your trucking business, read on. We’ll delve into the benefits you’ll enjoy by working with a factoring company below.
What Are the Benefits of Freight Invoice Factoring?
Some of the advantages you can gain should be obvious already. If you’re able to sell an invoice immediately and not wait for the customer to pay, you can turn around and inject that money directly into your business. That allows you to make payroll, to pay for truck maintenance and repairs, or even to expand your fleet, hire more drivers, or pursue further growth and success.
However, there are some important benefits to freight invoice factoring that might not be quite so apparent at first glance. We’ll dig into those below.
Risk Reduction: Working with a factoring company allows you to reduce the risk that you take on with each new client. Conducting credit checks on your own can be time consuming, or even impossible, leaving you facing serious risk if that client doesn’t pay on time, or at all. However, factoring companies will check the credit history of any potential client before you take the load, allowing you to reduce your risk dramatically, without spending any additional time or money.
Pay on Time: While you’ll be paid by your customers, you have suppliers and vendors that need to be paid, as well. With freight invoice factoring, you’re able to pay your bills on time. Often, this can allow you to take advantage of early pay discounts, further reducing your costs and increasing your success.
Make Payroll: Whether you have a team of drivers or only need to pay yourself, you won’t have to worry that making payroll will break the bank. Invoice factoring allows you to sell an asset and gain access to immediate cash flow.
Take on More Customers: While timely delivery and quality service are both keys to success, you ultimately need the ability to haul more loads. With freight invoice factoring, you have the money you need to take on more customers, haul more loads, and earn more money for your business.
Take on Customers You Ordinarily Wouldn’t: In addition to allowing you to avoid high-risk customers, freight invoice factoring also helps you take on customers that you might have once turned down. For instance, if a company was very slow to pay (but always paid eventually), you might have avoided hauling loads for them in the past. With invoice factoring, slow payment is not a problem, allowing you to broaden your customer list.
Get Your Money Fast: One of the most startling differences between invoice factoring and conventional loans is the speed with which you’re able to get your money. With a regular bank loan, you might wait up to two months. With factoring, you get access to your money in just hours.
Fuel Discount Cards: One of the single largest expenses a trucking company incurs, other than the cost of the trucks themselves, is fuel. Just refueling alone can put a significant strain on your financial situation. To combat this, many freight invoice factoring companies offer fuel discount cards that can be used at most major fuel stations in Canada and provide substantial savings over time.
Those are important benefits your business could take advantage of, but would you qualify for factoring? That brings us to our next area of discussion.
Who Qualifies for Freight Invoice Factoring?
If you’ve spent any time at all dealing with banks and other lenders, you know that lending criteria is tighter than ever. Lenders don’t want to take any risk. Is the situation with factoring similar? In a word – no. Who can qualify? Well, pretty much anyone can qualify, and that’s because factoring has nothing to do with your financial standing or credit history.
Here’s the thing – factoring companies really aren’t interested in your business’ creditworthiness. Their focus is on your clients. After all, this isn’t a loan, and you will not be the one responsible for payment. There is no repayment of the advance (unless you’re using recourse factoring and your customer doesn’t pay, which we’ll touch on shortly).
The factoring company will scrutinise your client or potential client, and determine if they are a worthwhile risk or not. If they are, they’ll agree to buy the invoice. If they’re not, they’ll decline. You’re still free to work with that client on your own; you just won’t be able to sell the invoice. That means you’re taking on the risk yourself.
However, there are a couple of requirements that apply to your trucking company. Factoring firms look for partners who run well-organised businesses, and you need to be free of any major legal problems or tax issues, as well. The reason for this is that liens can encumber your accounts receivable, which would make selling invoices impossible (because the money would technically go to the lienholder, rather than the factoring company).
Now that we’ve discussed the benefits and who qualifies for factoring, it’s time to dig into the process of factoring in greater depth.
How Freight Invoice Factoring Works
We’ve touched on the factoring process a bit, but you should know a few more details about how the entire thing works. It’s not that complicated, but it does differ somewhat from invoice factoring as applied to businesses in other industries.
Like other industries, trucking company owners will sell their invoices to a factoring company. However, the time-scales involved in trucking are radically different from other sectors like manufacturing or retail. So, you need almost instant approval.
Many factoring companies offer load approval by phone, email or through a web-based interface. This allows you to get preapproval within minutes after the factoring firm checks your client’s credit.
Then you need to send the company your load confirmation and any other pertinent information about the job. Next, you’re ready to load up and head out. You’ll receive your advance after delivering the load, usually within just a couple of hours.
Notably, many companies do offer fuel advances if necessary. These are made based on the invoice total, and will come out of your full advance, so you can think of it as an advance on an advance, in a way. Of course, in order to take advantage of this process, you’ll also need to know how to choose a trustworthy, reputable partner.
What to Look for in a Freight Invoice Factoring Company
It should be obvious at this point that freight invoice factoring can be immensely beneficial for your trucking company, capable of fostering stability, growth and success. However, the fact remains that you need to find the right factoring company, and there are more than a few of them out there. They’re not identical, either, which can complicate the process of choosing such a partner. You’ll need to know what to look for in a reliable, reputable factoring company.
History: One of the most important considerations is how long the company has been in business. While all businesses are new at some point, and there’s no rule that says you cannot work with a brand new factoring firm, those that have been in business for years are obviously doing something right. You have no such assurances about a new firm.
Customer Interaction: While the factoring company will handle collections, billing and even credit checking, which frees up your time to grow your business, your clients remain your clients, in the end.
That means you need to pay close attention to how a factoring company interacts with your clients. Rude or even predatory collections practices could ruin an otherwise positive relationship, costing you a client and potentially a great deal of capital down the road.
Ability to Spot Factor: Spot factoring is the process of selling individual invoices as you see fit. It’s not offered by all factoring companies, but can be highly beneficial, particularly for smaller trucking companies.
Because you’re able to pick and choose the invoices that you sell, rather than being locked into selling all your invoices, or all invoices for a particular customer, you retain a great deal of flexibility and freedom. That’s not to say that long-term contracts are always bad or should be avoided, though. You’ll need to understand your own requirements and which method will work best with them.
Available Back-Office Services: Especially for small business owners, and owner-operators, it’s crucial that you choose a factoring company that offers additional, value-added services. For instance, many companies can work as your in-house billing department, which frees up additional time for growing your business.
However, not all factoring companies provide additional services, and those that do sometimes charge additional fees for those options. Consider your choices carefully, and choose a company that provides the right blend of affordability and back-office services.
These are just a few of the considerations you’ll need to make. There are many others, ranging from the factoring fee charged, to hidden charges in the fine print of your contract. You will also need to consider whether it’s best to work with a company that requires you to factor all of your invoices, or lets you choose the ones that you sell.
This can have a significant impact on your overall costs, but the gained flexibility may be of more value to your business. It’s crucial that you make an informed decision here, though. It can be difficult to do, but there is hope.
Do You Need Help?
Finding the right freight invoice factoring company can be quite a challenge. That’s not to mention the fact that any time spent comparing factoring companies, reading through contracts, identifying services and the like is time that you’re not spending on the road or growing your business.
We can help you.
We specialise in providing our clients with the guidance and help they need to choose the ideal factoring company for their specific needs and growth goals. We invite you to take advantage of a free consultation with one of our freight invoice factoring specialists and learn for yourself how beneficial this process can be.