Trucking companies often find that growth is difficult (without freight bill factoring), simply because they lack consistent cash flow. For instance, let’s say you haul a load for a shipper. It arrives at its destination on time, is dropped, and the client is invoiced. You expect to move on to the next client, but that might not happen if the first is slow to pay.
A significant percentage of shippers don’t offer early pays, and they tend to take full advantage of the terms on the contract. It might be 30, 60 or even 90 days before you see the money from that first invoice. You could be facing any number of serious challenges, including:
- What do you do about cash in the meantime?
- How do you put fuel in your truck or trucks?
- How do you pay for insurance?
- If you have a fleet, how do you pay your drivers?
It can quickly grow into a very serious problem. There is a solution to this challenge – freight bill factoring. However, in order to use it effectively, you’ll need to know a few things. Of course, if you’re not familiar with freight bill factoring, a bit of an introduction is necessary.
What Is Freight Bill Factoring?
If you’re unfamiliar with the term, the good news is that the definition is pretty simple. Freight bill factoring is nothing more than selling an asset your business owns (an invoice in this instance) for cash to help ensure that you’re able to keep the wheels turning.
Those unpaid invoices are more than just a drain on your finances. They actually represent capital that belongs to your business, although it’s locked up and mostly inaccessible at the moment. However, by selling an invoice to a factoring company, you’re able to unlock that cash and use it immediately.
When you sell an invoice, you no longer need to wait for 30 days, 60 days or 90 days to get your cash. The factoring company will usually deposit your advance within 24 hours, often in much less time. Then, you can use that money to put fuel in your truck, to pay for insurance, to pay drivers, and keep your business running.
So, that’s freight factoring summed up, but chances are good that you still have a few questions about how the process works, and what’s involved. Let’s explore those.
How Does Freight Factoring Actually Work?
Before we delve into the tips for using freight factoring to grow your business, we need to take a look at how the process works. While it’s pretty simple, as we’ve illustrated above, there is more to it.
One of the first things to understand is that you will not recoup the total invoice amount from the factoring company. Like any other financial institution, the factoring company needs to make a profit in order to stay in business. That comes out of the invoice you sell. The overall process looks like this:
- You have an unpaid invoice.
- You sell it to a factoring company.
- The company pays you between 70% and 90% of the invoice as an advance.
- You use that money for whatever you need.
- Your customer pays the invoice amount.
- The factoring company pays you the remainder of the invoice, less a factoring fee.
Now, you’ve probably noticed something about the scenario above – the advance amount can vary quite a lot. The average in the industry is 70% to 90%, but there are some companies that offer more than this. There are also factoring companies that will give you 100% of the invoice immediately, less the factoring fee (note that this involves recourse factoring only, and does not apply to nonrecourse factoring).
So, how much are you going to lose out of the invoice in the form of factoring fees? It’s usually between 1% and 5% of the total. Again, it varies. However, if that percentage is likely to make your sale unbeneficial, leaving you without enough money to actually make a profit on the load you hauled, selling that particular invoice is probably not advisable.
Now that we’ve illustrated how the process works and some of the factors that will affect your experience, it’s time to dig into a few crucial tips that can help you grow your business with freight bill factoring.
Essential Tips for Using Freight Bill Factoring
Freight bill factoring can be a highly beneficial financial tool that allows your business to keep moving, even in the face of slow paying clients. However, following the tips below will help maximise the value you see from factoring.
Check the Perks
While generalist factoring companies might not offer much more than basic factoring, those that specialise in serving the trucking industry often deliver extra perks. It’s well worth your time to consider what perks are offered by each factoring company prior to making a decision on a particular partner. Some of the extra or value-added services you might take advantage of include the following:
- Fuel Discount Cards – These cards offer you the ability to save cash every time you fill up your truck. However, you do need to make sure that the discount is decent, and that the cards are accepted at widespread truck stops, not just a handful across Canada.
- Fuel Advances – Fuel advances are sort of like mini-advances on the main factoring advance. They’re made as soon as you submit the invoice to the factoring company, and they’ve approved it for sale. If you need cash for fuel immediately, then this is an important perk to look for with a factoring partner.
- Back-Office Help – Many freight bill factoring companies deliver value-added perks like billing and collections. This ensures that you’re able to focus on doing what you do best, without spending hours out of each month billing clients and attempting to collect money owed. It can also help you avoid the prospect of hiring additional staff, and then having to pay them, provide benefits and incur additional costs.
Check the Minimum
Some factoring companies require a minimum invoice value before they’ll work with you. If your company is small, or isn’t growing all that quickly, this could mean that you have to sell multiple invoices to the factoring company. This essentially locks you into doing business with them, and in some cases, could mean having to factor all of your invoices, not just those for slow-paying clients.
It’s a better idea to find a factoring company that does not require a minimum at all. This will allow you to sell only those invoices that you must. To illustrate why this is important, consider the money you would ultimately lose if you were forced to factor all of your invoices just to meet a minimum requirement.
In contrast, by only factoring invoices from clients you know will take a long time to pay, you build profitability while still ensuring that you have liquid capital available at all times.
Know How the Factoring Fee Is Assessed
The factoring fee is the cost of doing business with the company in question. However, in addition to charging varying percentages of the invoice total, factoring companies also generally assess the factoring fee every month.
So, if you’re selling an invoice with a term of 90 days, and your client generally takes the full amount of time to pay, then you’re looking at paying the factoring fee three times. With a large invoice over a long period of time, this can add up to a lot of money.
In fact, it can take most of the value out of factoring in the first place. The best defense here is to only factor invoices that will be paid quickly, or to ensure that the factoring fee is as low as possible.
Pay Attention to the Fees
Yes, freight bill factoring comes at a cost. However, it’s in your best interests to keep a close eye not on just the amount charged as the factoring fee, but any other costs you’re responsible for paying. Some examples of additional cost you might find yourself on the hook for paying include:
- Activation costs
- Account management costs
- Account maintenance costs
- Monthly service fees
- Minimum volume fees (charged if you don’t meet minimum volume requirements)
- Billing and collections fees
- Contract termination fees
These are just a few of the potential additional costs that might eat into your profit. Compare your options closely, and keep an eye on the fine print for hidden charges, as well.
Factor Only the Invoices You Must
While freight bill factoring is a valuable financial tool, it’s not something you want to use constantly. The reason for that is that it is costly – the best option is to wait for your customer to pay you. You’ll never see 100% of the invoice total when you factor, and over time, that does eat into your trucking company’s overall profitability.
For this reason, it’s important to look for a partner that allows you to factor invoices as you need to, rather than on an ongoing basis. By strategically factoring invoices from only slow-paying clients, you gain liquidity, while ensuring that you see as much profit as possible.
Know the Difference between Recourse and Nonrecourse Factoring
Remember when we mentioned recourse factoring above? It’s time to explore this topic in a bit more depth. On the surface, recourse factoring sounds ideal, because most factoring companies will not hold the balance of your invoice total until payment.
They’ll advance you all of the invoice amount except the portion required for the factoring fee. Of course, there’s a catch here. In recourse factoring, if your client doesn’t pay, then you’re responsible for repaying the factoring company. So, while this method can offer a lot of value and more money upfront, it’s best done only with clients that you trust 100% to pay their bill.
If there is any doubt, it’s better to use nonrecourse factoring. In this situation, the factoring company is responsible if your client doesn’t pay. Of course, the fees are usually higher, and a portion of the invoice total will be held in reserve, as well, so you’ll need to have a good understanding of your immediate cash flow needs.
Obviously, there is a lot of variance between fright bill factoring companies. That makes it crucial for you to find the right company the first time. There’s not a lot of room for trial and error here, as working with the wrong company could leave you tied to a contract with a firm that charges high fees for few benefits. Breaking that contract could be quite costly. So, how do you find a reputable factoring company? That brings us to the next area of discussion.
Finding the Right Factoring Company for Your Business
Understand from the outset that each trucking company differs, and the right factoring company for your needs might be the wrong one for another trucking company. That means you need to do your own research, based on business-specific requirements and immediate needs, as well as the creditworthiness of your clients.
You’ll need to delve into areas like the factoring company’s reputation, their customer service history, their collections techniques and much more. It can take a great deal of time, as there are many factoring companies doing business in Canada. Every minute that you spend comparing factoring firms, studying contracts, reading through the fine print, and vetting potential partners is another minute that you’re not building your business.
We can make things easier. We have years of experience connecting our clients with reputable factoring companies that meet their specific needs and requirements, saving you time, money and headaches. We invite you to take advantage of the free consultation with one of our factoring specialists to see how simple and effective the process can be.