What Is an OTR Factoring Company and Are These Right for You?

If you own a transportation business, you know how challenging it can be to keep cash flowing through the company. You might be forced to wait 30, 60 or even 90 days for shippers or brokers to pay their bills (that’s where an OTR comes in). In the meantime, where does that leave you?

You’re stuck. This is particularly true for smaller owner-operator businesses, but even larger transportation companies can feel the pinch when their clients don’t pay quickly. An can be the answer.

Of course, before you decide to take advantage of this business financing option, you’ll need to know more about how factoring works, and, more specifically, how an OTR factoring company can benefit your own business.

Understanding the Overall Factoring Process

OTR factoring companyBefore we delve into the specific benefits offered by an OTR factoring company, it’s important to address what factoring is and how it works. It’s pretty simple – you sell an asset (an invoice, in this instance) to a company in exchange for an advance on the amount due. Depending on the factoring company you choose, you’ll receive somewhere between 70 and 90% of the total invoice amount. Then, you are able to use that capital to fuel business growth, expansion and for day to day operating needs.

The factoring company then takes control of the invoice (and the collection process with your customer). When your customer pays the invoice, the factoring company will then pay the remainder of the balance on the invoice, less the fee you agreed on when signing the contract.

That’s the factoring process in a nutshell. However, there’s more to it that you’ll need to understand.

Recourse or Non-Recourse Factoring?

You’ll find that (including the OTR factoring company you ultimately choose to work with) can offer either recourse or non-recourse factoring. Some companies offer one or the other type, while others might offer both to fit your needs. While both involve the same process we described above, they’re not quite identical.

Recourse: With recourse factoring, you are responsible if your customer doesn’t pay on time, or doesn’t pay at all. This reduces risk for the factoring company, and recourse factoring usually comes with lower fees. However, it can be problematic if you’re forced to repay the advance (particularly if that money has already been spent). Ideally, you’ll only use recourse factoring with customers you know will pay.

Non-Recourse: Non-recourse factoring is different. In this process, the factoring company maintains responsibility if your client doesn’t pay. They take on the full risk themselves, and you’re not obligated to repay the funds if your client fails to pay. Because the factoring company takes on a greater risk in this situation, the fees assessed on the contract will be higher (sometimes substantially so).

How Factoring Differs for Transportation Companies

We’ve gone over the general factoring process as applies to all businesses, but for transportation companies, there are a few significant differences. The overall process will be the same, but there are some specifics that you’ll need to look for in a factoring partner. This is due to the nature of the transportation industry, and the differences between a trucking company and other types of businesses that might make use of factoring.

One of the most significant differences in factoring for transportation companies versus with other industries is the fact that you may or may not be familiar with your customers. You might be working with a customer on a one-time hauling job, or you might regularly partner with a company to deliver its products around Canada.

This means that there’s a lot of ambiguity in terms of creditworthiness where your customers are concerned. A factoring company that has little or no experience in the transportation industry might be hesitant to take on that risk, and if they decide to do so, you might be facing steeper fees than would be ideal.

You also have a greater need for liquid capital at all times than other business owners. While a manufacturing business owner might need cash to raw material, to pay utility bills and make payroll, you need cash on a daily basis for fuel, for insurance costs, for your truck payment and more. If you operate a larger trucking company, then you have drivers to pay, fleet maintenance costs and a lot of other costs.

Most generalist factoring companies simply lack the experience and knowledge necessary to work with transportation business owners. For that reason, it’s better to search out an OTR factoring company that has in-depth experience and expertise in the trucking industry.

The Benefits of a Specialist OTR Factoring Company

You’ll find a host of benefits available when working with an OTR factoring company that you won’t with a generalist firm. These can include the following:

Fuel Cards: In order to deliver greater value to their clients, an OTR factoring company may offer discount fuel cards. These perks allow you to fuel up your truck (or trucks) and save money at the pump every single time. Of course, you’ll need to learn about where the specific factoring company’s discount card is accepted, and whether it can be used at an ATM to get cash against your advance for other operating needs.

Credit Checks: We’ve mentioned the need to check the credit of potential clients already, but it bears repeating. You don’t want to take on a risky client, or there’s the possibility that you won’t get paid. However, conducting credit checks isn’t a simple, fast process, and that costs you time that could be better spent on the road.

Even if you’re running the office of a larger trucking company, credit checks can be time consuming and frustrating. An OTR factoring company can handle this on your behalf. It’s actually in their best interests to do so, as it reduces their risk, and it can usually result in lower fees for you.

Billing: How much time do you spend on average just billing your clients? Most trucking company owners spend a significant amount of time on billing, and this keeps them off the road (and not making more money). A factoring company that specialises in the transportation industry can offer billing services to free up time, reduce hassle and streamline the operation of your business.

Collections: Collections, like other back office duties, requires that you take time off driving to focus on managerial aspects of your business. If you’re tight on cash flow, that can create even more problems. The right OTR factoring company can handle not only billing, but also collections for your company.

Same Day Funds: Let’s be honest – cash flow is a serious concern, otherwise you wouldn’t be considering factoring in the first place. So, the faster you’re able to get your money, the better. Many are able to provide you with the advance on your invoice in as little as 24 hours. Same day funding ensures that you have the capital needed to keep your business running.

These are just a few of the many benefits that you can find with an OTR factoring company. There are several others, as well. However, in order to enjoy those benefits, you’ll need to make sure that you’ve chosen the right factoring company. They’re not all the same, and a misstep here could cost you.

How to Choose an OTR Factoring Company

Finding the right OTR factoring company isn’t as simple as using a search engine and contacting the first factoring company that shows up in your search results. Like trucking companies, factoring firms differ greatly from one another. You’ll need to compare your options based on several different factors.

Long-Term Contracts: In the wider factoring world, long-term contracts are pretty common. After all, a company that supplies merchandise to a retailer is most likely going to be their partner for quite some time, so there’s not much worry surrounding a long-term agreement with a factoring company. However, in the trucking industry, you might haul a load for a client, and then never work with them again. This means that lengthy contract requirements should be avoided. Make sure you work with a factoring company that allows you to choose which invoices you’ll factor, and when.

Availability: Customer service and access to reps from the factoring company are important considerations when choosing a partner. For many business owners, having that access during standard business hours is fine. However, as a transportation business owner, chances are good that you don’t work a regular 9 to 5 shift, and you need a factoring company that will be available when you need them.

Access to Both Recourse and Non-Recourse Factoring: We talked about recourse and non-recourse factoring previously, and that discussion applies here, as well. Choose an OTR factoring company that offers both recourse and non-recourse solutions to fit different needs. Recourse factoring can be a great option for clients that are creditworthy, and non-recourse factoring can be useful if there’s a greater risk involved.

Back Office Services: If you’re a small transportation company owner, you know the frustration that comes from spending hours on back office tasks like billing and invoicing, as well as conducting credit checks on potential customers. Make sure that the OTR factoring company you choose provides a full suite of back office services.

However, you also need to ensure that this doesn’t dramatically increase the costs. While all factoring companies will charge an additional fee for these services, it shouldn’t eat up your advance, or there’s little point in factoring at all.

Additional Fees: You’ll certainly pay a fee for the factoring service. That’s based on the amount of the invoice being factored, and the company’s policies. However, you might find that you are charged additional fees. These range from application fees to assessment fees to hidden charges tucked away in the contract you have to sign.

Make sure you know all the fees that you’ll have to pay, and why they’re being charged. Often, these can add up to a substantial amount, and if you’re in a tight financial situation already, it can reduce the value of factoring.

Discounts for Bundled Services: While not true with all factoring companies, some will offer a discount on fees if you bundle services together. For instance, while you might pay more overall, you may save by bundling all back office services together, rather than only outsourcing billing, collections or credit checking.

As a final note, conducting due diligence before partnering with an OTR factoring company is crucial. You’ll find to learn all you can about them, about their customer service, about their fees, and their overall reputation.

Ideally, the company will provide you with access to current or past clients that have used their services so you can get a firsthand account of what you might expect during your own relationship.

Ready to Get the Cash You Need?

Obviously, an OTR factoring company can provide you with invaluable benefits and the steady cash flow you need to keep your business running. However, sorting through your options can be more than a little difficult. That’s where we come in. We offer a free consultation with a factoring specialist to help determine your needs and then pair you with the right factoring company. We invite you to get in touch with us today and find out how simple it can be.