Freight Factoring Companies – How to Pick the Right Option?

Freight factoring companies can provide your trucking business with the liquid capital needed for stability and even to foster growth. One of the oldest commercial financial tools, factoring has been around for centuries, and continues to gain popularity, particularly with small and fast-growing businesses that often face cash flow problems.

However, in order to benefit from freight factoring, you’ll need to work with a factoring company. They’re not all created equal, and it’s crucial that you consider several factors before choosing a partner. Of course, if you’re not familiar with factoring and how freight factoring companies work, a brief introduction is necessary.

What Do Freight Factoring Companies Do?

Freight Factoring CompaniesEssentially, freight factoring companies are in business to do one thing – buy invoices from trucking companies like yours. The process of factoring, whether we’re talking about the trucking industry, research and development, the staffing industry, the construction industry or something else completely, is largely the same. It looks like this:

  • You have an unpaid invoice from a client.
  • You sell that invoice to a factoring company.
  • The factoring firm advances you a portion of the invoice total.
  • You use that advance to keep your business moving.
  • When your customer pays the invoice, the factoring company deposits the balance due, less a fee.

It seems relatively simple and straightforward, and it is. It can also offer you a number of benefits that might not be apparent at first glance, which brings us to our next topic.

The Benefits of Working with Freight Factoring Companies

When you work with freight factoring companies, you can gain access to a number of important benefits. While these will vary from one company to another (because they’re not all the same), it’s important to understand why you want to have such a firm as a partner in the first place. Below, we’ll discuss some of the most important advantages you can gain through such a partnership.

Immediate Payment

This is a big one, particularly for new trucking companies and those that are seeing significant growth in a short period. Let’s say that you are an owner-operator, and you have a single truck. You haul a load for a client, drop it at the destination and then bill the customer. Then, you wait. And wait. And usually you wait some more. Most invoices are due within 30 days, although some might have terms that extend to 60 or 90 days. During that time, you’re stuck with limited cash flow and unable to grow your business. In fact, you might be unable to take on a new client without the money for fuel, maintenance, insurance, food while on the road and other costs.

Access to Additional Perks

Another benefit of working with freight factoring companies is having access to value-added services. While the exact perks you’ll gain will vary from one company to another, they can range from access to discount fuel cards and fuel advances to being able to outsource your billing and collection needs to an expert.

Credit Checking

How much of a risk is that new client you’re considering? What sort of payment history does a particular client have? Will you get paid? Those are all questions that you need to answer before agreeing to haul a load for a customer. Answering them can take a lot of time and legwork. With freight factoring companies, you can an expert capable of checking the credit for any potential new client. That provides peace of mind, but it also reduces your risk (and the factoring company’s risk, of course).

Those are pretty compelling benefits. However, there are many fright factoring companies in Canada, and they’re not identical. You’ll need to consider a number of factors when deciding which one you’ll work with, and that brings us to our next topic.

Considerations to Make When Comparing Freight Factoring Companies

You can’t just jump into freight factoring without vetting the potential partners you’ll be working with. However, if you’ve never worked with a factoring firm before, it can be difficult to know what criteria is most important to your decision. In this section, we’ll outline some of the most crucial considerations you’ll need to make.

Do They Specialise?

This is perhaps the single most important consideration to make. You’ll find generalist factoring companies out there, as well as those that specialise in particular industries. Considering the unique needs of trucking company owners, it’s vital that you work with a factoring company that specialises in freight factoring, as opposed to another industry, or with a generalist factoring company.

Specialisation ensures that they’re familiar with the specific needs of trucking company owners, freight brokers and others in this industry, and can deliver custom-tailored solutions that fit those needs. It may also mean lower factoring fees, more lenient contract terms, less stringent minimum volume amounts and more.

Copies and Faxes Not Originals

One of the most important things to consider when comparing freight factoring companies is whether they’ll make a funding decision based on copies of faxes, or if the insist on having an original copy of the invoice.

Obviously, sending an original copy takes a considerable amount of time. Even if you overnight it, it can still take a full business day to reach the factoring company, and sometimes more. There’s also the expense involved in getting the original invoice to the factoring company.

However, if the company will accept faxes or photographic copies of an invoice, then your process is sped up considerably. They’ll have a copy of the contract in just seconds, and can make a funding decision very quickly. That ensures that you have less down time, and that you can move faster, which is always an important capability in the trucking industry.

Contract Terms

When you work with freight companies, you’ll have to sign a contract. However, not all contracts are the same. Some companies try to lock you into a relationship for a year at the minimum. Others offer month-to-month agreements. Find the contract terms that fit your needs best.

For most trucking companies, additional flexibility here is a good thing, as it can allow you the freedom you need to change factoring companies, to factor only when you truly need it, and more.

Being locked into a contract is a bad thing if you find that the company isn’t what you thought, assesses hidden fees, or has serious restrictions that impinge your ability to grow your company. Plus, contracts can be very costly to break.

Minimum Volume Requirements

Some freight factoring companies will let you sell invoices as you see fit. Others require that you factor a specific volume with them. Ideally, you will not be required to meet any type of volume requirement, as this will directly affect your profitability.

While factoring is usually highly beneficial, there is little point in selling an invoice if you don’t need the cash immediately. There is a cost involved with factoring, and selling invoices when you don’t need to reduces your profitability while increasing your operating costs.

It’s best if you find a company that will let you sell invoices as you need, rather than locking you into a long-term contract with requirements as to the volume of sales. Again, you could find yourself in a difficult situation, with the only way out being to break that contract, which could cost you a great deal of money.

Recourse and Nonrecourse Factoring

Factoring comes in two basic types – recourse and nonrecourse. While they’re similar, they’re not the same, and each has a different purpose. Nonrecourse factoring should only be used when there’s a risk that your client won’t pay, or will pay late. In this situation, the factoring company assumes the risk, and you’re in the clear if the client doesn’t pay.

Recourse factoring, on the other hand, is the better option for situations where there’s a no potential risk of late or nonpayment by your client. In this situation, you’re on the hook if your client fails to pay, and you’ll be required to repay the entire advance to the factoring company. Only opt for recourse factoring if you know and trust the client, and have a good working relationship.

Advance Amount and Speed

The entire point of working with freight factoring companies is to get access to cash quickly, rather than waiting until your client pays the invoice. So, it makes sense that the speed with which the company can advance you that money is important, as is the amount they’ll advance in the first place.

Understand that most factoring companies will advance between 70% and 90% of the invoice total in a nonrecourse factoring situation. If you’re going the recourse factoring route, where you maintain responsibility for nonpayment, you may be able to get the entire amount advanced, less the factoring fee. However, for most trucking company owners, nonrecourse factoring is the better choice, so count on seeing less than 95% of the total as an advance.

It’s important that the factoring company be able to deliver your cash quickly. In general, you should never have to wait longer than 24 hours for your advance, unless you’re working with a brand-new client and the factor requires a few days to check their credit history and assess the risk they present. If the company requires more than 24 – 48 hours for most invoices, you should look elsewhere.

The Fee Structure

It’s important to understand going into any relationships with freight factoring companies that this is not the “most affordable” financial tool. If you can qualify for a bank loan and don’t need liquid capital immediately, conventional lending may be a better option.

However, many trucking business owners find that they don’t have perfect credit, and the fact that lenders continually tighten their lending criteria means that more and more businesses with good credit can’t get a loan. That means factoring might be a vital solution. If so, understand that you need to pay close attention to the fee structure of the factoring company you choose.

You’ll definitely pay a factoring fee for the service. This is applied to each invoice you sell, and is based on the value of that invoice. Generally, it’s between 1% and 5% of the total. However, that’s not set in stone, and some factoring companies may charge more. In addition to the factoring fee, you may also be required to pay additional fees, including the following:

  • Account setup/activation fees
  • Account management/maintenance fees
  • Membership fees
  • Application fees
  • Minimum volume fees (charged if you don’t meet your contractual minimum)

Obviously, the fewer fees you’re charged, the more affordable factoring will be in the long run. However, it can be hard to determine exactly what fees are being charged and when, unless you study the fine print on each contract.

Comparing freight factoring companies can be a lengthy, drawn-out process, as you can guess from the information above. However, you can’t afford to take shortcuts here. Your company’s financial stability depends on you choosing the right factoring partner. If you’re not willing to spend the time necessary to vet potential options, then factoring might not be the right choice for you. However, there’s help available.

We Can Simplify the Process

If you’re daunted by the prospect of spending hours just comparing different factoring companies, we can make things simpler. Our entire goal is to ensure that our clients are paired with the right factoring company for their needs. We have years of experience doing exactly that, and the expertise necessary to ensure a perfect match between you and a freight factoring company. We invite you to take advantage of the free consultation with one of our factoring specialists and learn firsthand how we can streamline the process for you. Get in touch today.