Factoring otherwise known as account receivable financing or invoice financing is a finance strategy that enables businesses to access invoiced amounts before payment from customers is due. In the freight industry a freight factoring company purchases account receivables or invoices from trucking companies for a fee. Factoring enables companies to receive funds in advance and is a great strategy for managing cash flow when a business is working with clients that have payment terms of 30 days or more.
What are Some of the Core Benefits of Factoring?
While there are a host of administrative benefits, the greatest advantage of freight factoring is the ability to access finances faster, leading to more growth opportunities. Some main benefits include;
- Reduces administrative expenses: By selling outstanding invoices to a factor, you reduce overheads and other costs associated with accounts receivable. This allows for better use of financial and human resources.
- Improved financial outlook: Your factor will purchase your invoices for an upfront fee and allows your business to access funds faster, this gives your company access to more investment and financial opportunities.
- Flexibility: Freight factoring avails a host of benefits to startup companies. Factoring agreements can also be tailored to meet the unique needs of your business.
- Efficiency: Factoring improves efficiency by transferring invoice collection to a factoring company.
How Does Freight Factoring Work?
To initiate the factoring process, you and your factor must establish a contractual agreement. Before signing the agreement, your factor will first vet the creditworthiness of your customer. On approval, your factor will proceed to purchase your invoice and advance cash to your business. The factor will collect the debt from your customer on the stipulated date. Using this strategy allows you to receive amounts attached to invoices promptly instead of having to wait for prolonged periods to collect amounts owed on invoices from clients, therefore giving you a steady supply of working capital.
The Freight Factoring Process
- You invoice your customer: The freight factoring process commences with you issuing an invoice to your customer for work completed. There must be an outstanding invoice or invoices to your customer before the freight factoring process can begin since the invoice is the basis for the factoring agreement.
- You assign the invoice to a factoring company: If you are using larger volume factoring, commonly known as contract factoring you are required to assign and sell all your outstanding invoices to your factoring company. You can also opt for low volume or spot factoring which works like a line of credit and allows you to choose the invoices you wish to factor. However, your arrangement may vary depending on your factor and the kind of contract you have.
- Your factoring company pays your advance: Once you’ve selected the invoices that you want factored, typically your factoring company pays you a percentage of the value of the invoices. The amount paid depends on the advance rate you agreed on, which usually ranges between 80% and 90%.
- Your client pays the freight factoring company: Your client will then pay off the invoice by paying your factoring company. Through the freight factoring agreement, the responsibility for collecting amounts due on invoices is shifted entirely to the factoring company.
How Does Freight Factoring Fuel the Growth of Your Company?
- Eliminates Cash Flow Slow Down
Companies are in constant need of cash flow to meet operational costs. The freight industry is characterized by heavy operational costs, such as fuel, repairs and need for new equipment. Freight companies often find themselves in a cashflow conundrum due to slow paying clients or clients with extended payment terms. This is the core reason why freight factoring is beneficial to businesses in the freight industry.
- Freight Factoring Avails a Host of Competitive Advantages
Receiving funds due on customer invoices within hours or days avails any freight company a great competitive advantage. Since clients with extended payment terms or slow paying clients no longer affect your cash flow you can increase your customer base and haul more loads since you can comfortably cater for the additional operational expenses associated with expanding your business. Your factoring company will also credit check your existing clients and any new clients that you may wish to work with.
- Frees Up Working Capital
No business can grow without adequate working capital. If a huge portion of your working capital is locked down in customer receivables, it cannot cater for operating expenses, meet payroll expenses or cater for the cost of taking on new business. Inadequate cash flow can stall the growth of your business.
Freight companies that take advantage of freight factoring get instant access to working capital or cash that would otherwise be locked down for months allowing them to carry on business without any hindrances.
- Provides Freight Companies with Financial Leverage
Adopting a freight factoring strategy makes your company attractive to multiple stakeholders. This includes suppliers, vendors, business partners and financiers. With solid working capital you are at a vantage point and are able to negotiate for more favorable terms. This means improved profitability.
- Reduces Operational Costs
All operational costs associated with accounts receivable such as payroll and bookkeeping are eliminated altogether. In addition, freight companies that factor without recourse also eliminate all risks associated with bad debts, since the factoring company assumes all the credit risk.
Instances When Your Company Can Benefit Most From Freight Factoring
- Your Business is Growing Steadily
It takes steady cash flow to keep your freight business in operation. Expenses such as fuel, payroll, insurance, repairs, permits and tolls are constant and without good cash flow you cannot meet your basic operating costs. With freight factoring you eliminate wait times, you don’t have to miss out on revenue because your trucks have broken down or are sitting idle. Freight factoring allows you to stay ahead of your expenses and expand your business steadily.
- You Can’t or Don’t Want to Borrow Funds
Banks and other financiers are hesitant to loan money to freight companies due to the risks involved. Your company may be new or you may not have enough collateral. However, none of these factors will prevent you from being approved for freight factoring. Freight factoring is dependent on the credit worthiness of your customers and has nothing to do with your credit. Quick approval is also a defining feature of freight factoring, you can get paid in hours, hence never need to worry about cash emergencies.
- You are Looking for a Financial Partner
To experience growth in your freight business you need a concrete plan to pursue and manage growth. This plan must include a smart way to manage cash flow and invest in your business. Working with a freight factoring company as a partner ensures that you have a great cash flow and you’ll also have someone to handle your billing and collections so that you can concentrate on running and growing your business.
You Company Can Use Factoring to Cater for Its Special Needs
Different companies use factoring for different reasons. Cashflow assistance is a core benefit for all freight companies. However, your main focus may be business growth. You may also lack the manpower or capabilities to manage the communication and account receivables associated with multi-truck freighting. If you are a new company, it may also be challenging to get adequate financing from banks. Depending on your business and stage of growth you can strike a partnership with a factoring company to cater for your unique business needs.
Freight Factoring is Scalable and Offers Lots of Flexibility
As your business grows the number of invoices you issue also increases. The more your invoices the more the amount of funding you can receive from your factor. As a business owner you can also opt to factor a number of invoices or all outstanding invoices. If for instance you want to invest in a new opportunity and need quick cash, freight factoring may be your only option.
As a new or established freight company you can use freight factoring to grow and expand your business. You can enjoy a steady flow of debt-free cash by factoring account receivables instead of dealing with debt that comes with taking a bank loan. Freight factoring will also help streamline your cash flow, determine credit worthiness of customers and outsource collections.
