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Like most industries, trucking companies are responsible for a variety of expenses before their invoices ever get paid. Fuel, repairs, regular maintenance, carriers, freight agents, and, of course, salaries, are all common expenses that must be paid to keep your trucks rolling. In the meantime, you have outstanding invoices. The result is often stagnant cash flow. Many trucking organizations turn to freight factoring companies to keep funds coming in and cash flowing.
Freight factoring companies are financial organizations. You sell them your invoices and the factor pays them, minus a small finance fee. You receive your money in days rather than months. With banks continuing to tighten their qualifications to obtain traditional credit, freight bill factoring has grown in popularity.
There are two types of factoring, recourse and non-recourse, which determines the responsible party in the event your invoice goes unpaid. In recourse factoring, the responsibility for unpaid invoices lies with the trucking company. If your client refuses to pay an invoice, you buy it back from the factor. Non-recourse factoring puts that risk on the factor's shoulders. Once you sell an invoice, it belongs solely to the factor.
Once you sign on with a factoring company, the process is simple (as is signing with the factoring company). When you book a job, you enter the information about the client. If you've previously worked with the client and your factor approved them, you're good to go. If it's a new client, you enter the pertinent information and the factor completes a credit check. If all is well, you receive authorization. With freight bill factoring, your customer's credit is more important than yours.
Upon delivery, submit documentation to the factoring company, such as a bill of lading or proof of delivery. Submission methods vary by provider, but most offer online applications. Upon receipt of your documentation, the factor deposits payment, often within 24 hours. Payment amount varies, though most factors pay between 70 and 80 percent of the amount owed. Then, when you client pays the invoice, the factor deposits the remaining funds into your account, minus their fee, which also varies depending on your rate plan.
Although rates and fees vary by factoring company, there are three main fee structures.
- Flat fees are exactly what they sound like. You pay a set percentage on every invoice, regardless of how long that invoice remains outstanding.
- Tiered factoring fees charge by how many days a bill is outstanding, with accrual occurring daily, weekly, or monthly (similar to the interest on a loan). You may also see fees calculated in 10- or 15-day blocks. Monthly is the most common accrual method, though you often find factors that quote a monthly rate but calculate the fees daily or weekly. For the invoice seller (the trucking company), calculating fees daily or weekly is preferable, as it lowers the seller's cost. For example, if your customer pays the invoice on March 10, a monthly tier means you pay for an additional 21 days.
- Prime plus fees are determined by the prime interest rate. Similar to flat fees, your cost is a percentage of every invoice, determined by prime "plus" whatever percentage the factor charges. That percentage varies, but 3 to 4 percent is common. The prime rate changes periodically. As of July 2017, it was 4.25 percent. If the factor charges 3.5 percent, that would make your rate 7.75 percent, or $7.75 for every $100 invoiced.
The main advantage of freight factoring, of course, is an immediate increase in your cash flow. In addition, the process is simple, and easier to complete than traditional financing. Approval depends on your client's credit rating, not yours. One of the greatest advantages, though, is that you no longer need to worry about billing and collections. Instead, you can focus your energy on finding new clients, securing loads, and hauling freight, all of which help you grow your business quickly.
You also find factors that offer other perks specific to trucking companies and freight brokerages, such as fuel advances and discounts on fuel and tires. They may also host private load boards that help you find new clients.
Although you don't have the same requirements as with traditional financing through a bank, there are certain qualifications you must meet for freight factoring. First, of course, you must be a carrier or freight broker, and must possess the required documentation and licenses. Your freight bills must be free of liens, and your clients must be creditworthy.
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