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.
What’s Involved with Freight Factoring?
Factoring freight bills is nothing more or less than selling an asset that your business owns already in exchange for cash. For example, suppose you upgraded one of your trucks. What would you do with the old one if you didn’t actually need it to operate your business? You’d sell it, and use the capital from the sale to further build your business, right?
The concept involved with freight factoring is very much the same, except that the asset you’re selling isn’t a truck or trailer. Instead, it’s an invoice. You sell the invoice to a factoring company, which in turn gives you an advance on the invoice total.
That money can be used to put fuel in your truck, to pay for insurance, to make loan payments or whatever else you might need. 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.
What Is Freight Factoring?
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.
The Factoring Fee
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.
The Benefits Offered by Freight Factoring
One benefit that should be clear from the outset is this: You’re not stuck waiting for a slow client to pay their bill. Depending on the terms you offer on each invoice, that could leave you in the lurch for 30, 60 or even 90 days without being paid.
The immediate upshot of that situation is that you are stuck without access to vital capital. It’s possible for trucking company owners to discover that they are:
- Unable to put fuel in their trucks
- Unable to make truck payments
- Unable to pay for truck insurance
- Unable to take on new jobs
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.
Fuel Cards: Freight factoring companies understand that cash is tight for trucking companies, and that you need to save every cent possible. To that end, many offer fuel cards that provide you with significant savings at the pump. These are generally free with your contract, and the savings can add up quite a bit over time.
Fuel Advances: Many trucking companies operate with very tight budgets. In some cases, you may be hard pressed to fill up your truck before you can haul a load. In this instance, a freight factoring company may be able to offer what’s called a fuel advance.
Essentially, this is an advance on the advance – they quickly deposit enough of the larger advance for you to fill up and get on the road, and then the remainder is deposited at the usual time. This can alleviate headaches and hassles involved with being unable to fuel up before getting on the road and allows you to provide faster service for your clients.
Credit Checking: How much risk do you take on with each new client? It’s like quite a lot if you’re like most trucking company owners. Really, how much time do you have to dedicate to checking the credit and payment history of each potential new client? For most owners, there’s barely enough time in the day to build your business.
A freight factoring company can provide credit checking services as part of your agreement. While that definitely works in the factoring company’s favor, as it reduces the risk they take on by purchasing your invoices, it also reduces the risks you face during day-to-day business.
Back-Office Services: How much time do you spend each month on back-office work, like billing and collections? Chances are it’s a substantial amount. One answer to this is to hire someone to do the work for you, but that ultimately only increases your operating costs. A freight factoring company will usually offer at least some back-office services to lighten your load and help you save some money.
As you can see, there are some very important benefits to be gained by working with a freight factoring company. The problem is that not all companies are created equal. In addition to the question of generalist versus specialist, you also need to make sure that the company has a good reputation, doesn’t charge hidden fees, practices excellent customer service, and more. In the next section, we’ll discuss a few of the things you will need to verify prior to signing a contract with any factoring firm.
Challenges in Finding the Right Freight Factoring Company
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.
Hidden Fees and Charges
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.
Minimum Volume Requirements
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.
They Offer Only Recourse Factoring
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.
We Can Take the Load Off
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.