Is Freight Factoring a Legitimate Way To Fund a Trucking Company?

Running out of cash is common when operating a business, moreso in the trucking industry where clients take several weeks and even months to make their payments.

Constant cash flow is integral to the success of all trucking companies. It allows the owner to carry out vital business functions such as paying driver salaries and fueling trucks without any hitch.

While there are many ways for a trucking company to acquire the funding they need to use as working capital such as loans or scouting investors, perhaps the most reliable of them all is freight factoring.

Freight factoring is a form of financing for truck companies, such as, where the carrier sells unpaid invoices for delivered loads to a factoring company. The company then collects the payment from the client of the carrier directly.

But there is a lot more to freight factoring other than simply providing cash to trucking businesses. Read on to understand why you need to consider it as a funding option for your trucking company.

Factoring Rates and Advances

Each factoring company has its own set of competitive rates and advances. A factoring rate is a percentage that the company will charge for the amount of money you want for your invoices. The usual rate is usually between 1% and 4% of the sum stipulated in the invoice. The creditworthiness of your customer will also determine the rate the company will charge.

An advance is the amount of money you get from the company. Advances can reach anywhere between 80% and 90% so try and negotiate a good rate and advance based on your business needs.

Recourse and Non-Recourse Factoring

Factoring companies often offer two types of freight factoring; recourse and non-recourse. Recourse means your company must pay back the amount advanced to you if your customer fails to pay the invoice. It is the most common type of factoring.

Non-recourse means the company will not compel you to buy back the invoice should the customer fail to pay the invoice.

With non-recourse, trucking companies can avoid bad debt from clients who default on payments for goods already hauled. However, factoring companies do rigorous research and only consent if the customer involved has a good credit rating.

Bad credit ratings mean the risk of non-payment is very high, and a company will think twice before offering a carrier a non-recourse factoring contract. These agreements are, however, not as popular because of the high rate.

Single-Installment Agreement

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A single installment agreement is the most common form in the business. The carrier receives a single payment from the factoring company in a single installment agreement, also known as a full advance. The advance usually ranges between 95% and 98.5% of the total invoice value.

The company will deposit the advance in the trucking company’s accounts, and the remaining 1.5% to 5% that was not deposited serves as the fee of the transaction.

Two-Installment Agreement

In a two-installment agreement, the company will split the advance into two payments. It will deposit the first payment to the account of the carrier, usually between 90% to 95% of the invoice value.

After the company has deducted their fees, the remainder of the funds is deposited to the carrier’s account when the customer pays the invoice in full. This agreement is cheaper than a one-single agreement and is highly preferred by many large carrier companies.

Why Should You Consider Freight Factoring?

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Freight factoring offers plenty of potential benefits to trucking companies. Here is a list of some of its advantages.

Receive Money Within a Short Time

As a trucking owner, it can help you receive a good amount of money within a short time (usually no more than 24 hours). Fast cash advances are important when you need to pay drivers, expand your business, buy fuel, pay for repairs, among other expenses.
Other forms of financing, such as loans, can take weeks before you get the money you need and could see you lose potential clients.

Easier To Get Compared To Other Options

Other possible options of adding capital to your business take a long time and the application process is usually complicated, requiring you to prepare and submit tens of documents.

Freight factoring, however, requires you to have valid invoices only. The factor does not require numerous documents or other requirements as seen with banks before they give you a loan.

You Can Get Fuel Advances

A lot of companies usually offer their clients a fuel advance of up to 40% of the invoice. This makes it easier for trucking companies to take on more loads since they’ll have the cash to fuel their trucks.

Your Credit Score Won’t Impact Your Advance

Your credit score does not matter in freight factoring since the company is only interested in your customer’s credit score.

Before you get a loan from the bank, the institution will check your credit score and use it to determine the amount of money they will give you, if they’re going to give you any money at all in the first place.

Companies will do their own credit check to check on your client’s credit score so they can determine if the client will pay your invoice in good time. As the client of the company, the carrier does not incur any costs for this process and it also provides them with insight into their clients.

Long-Term Contracts Are Not Necessary

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Depending on the arrangement, freight factoring does not involve long-term contracts. Its contracts are flexible, and you can adjust them or terminate them whenever you want.
You should, however, be careful and not sign a contract with high termination fees. Some companies use high termination fees to ensure you stay in the contract even if you do not want to.

Helps You Take on More Business

It is difficult to take on more customers if you don’t have the cash to pay for the cost of hauling their loads. Factoring provides trucking companies with the cash flow they need to finance the transportation of several loads.
It also allows you to take bigger orders than the ones your companies usually get.

The Advance Is Not Limited to Paying for a Particular Expense

Unlike other lines of credit, you can use the money advanced from the company to pay for any cost you deem necessary. If you take a bank loan to buy more trucks, you cannot use the funds on anything else other than buying trucks.

With freight factoring, the use of the money does not have to be a business expense, and you can use the money however you feel like.

Freight Factoring Is Small Business Friendly

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Starting a trucking company can be a very exhausting, expensive, and time-consuming affair. If you have one or two trucks, you cannot take many clients at a time, and it will take you a long time before you start making back some good money.

It can help you start-up your trucking company and expand within a short time. You can sell your first invoices to hire more trucks or fuel your existing trucks to better serve your customers.

No Need for Security

Freight factoring does not require any form of equity, and you do not have to surrender any company assets or a portion of your company. Giving up assets for loans can be dangerous. One single default in payment and the banks will come looking to repossess your assets.
But with it, you only need to provide the company with a valid invoice for there to be a productive transaction. There’s no need to provide any asset as collateral for the cash advance.

Easy To Increase Line of Credit

The amount you receive from a company depends on your invoices’ and your clients’ creditworthiness. If you keep getting bigger invoices from clients with good credit, you can establish a good working relationship with the company. This could mean even faster financing and aggressive growth for your trucking business.

Freight Factoring Saves Time

It saves you the time you would have otherwise spent following up invoices, collecting, and checking on payments.

Companies take care of the debt collection side of the business and will take care of any dispute that might stem from the invoice. This allows trucking owners the freedom and flexibility to fully focus on other areas of the business that are in dire need of their attention. Consider for Your Factoring Needs

While freight factoring has many potential benefits, some companies are simply in business to make a profit. Be wary of companies with very alluring low rates. Such companies tend to have plenty of hidden costs so they can break even. If you do not read the contract carefully, you might end up paying more than is required. You need to choose wisely a company such as that will best serve your business interests.