Many trucking businesses resort to freight factoring to stay ahead of their expenses and out of debt with a steady flow of cash. But what exactly is freight factoring? And what does a freight factoring company do?
Before we begin, Trucker daily is a proud partner of Haulpay by Comfreight and if you would like us to introduce you to our exclusive factoring partner, visit this link and fill out the form to request more information.
What Is Freight Factoring?
Freight factoring, or transportation factoring, is when you sell your outstanding invoice or bill of lading to a factoring company in return for cash. With freight factoring, you get paid quicker than your customers would normally pay you.
In many sectors, you get paid immediately for your services. In the bulk transportation world, though, things are not usually as smooth. You may send a load to a customer but not get paid until 60 or even 90 days after. But during this waiting period, you have your truck drivers to pay and some other immediate bills to settle. You have a business to run with cold, hard cash, and definitely not a promise of cash to come.
The old practice would have you get a bank loan and settle your bills. When your customer finally pays, you settle the bank… with their massive interests. But you don’t have to go through this process anymore now that we have many freight factoring companies.
What A Freight Factoring Company Does
A freight factoring company is ready to help you keep your business afloat by supplying you with cash flow in return for your account payables and unpaid invoice.
You ship the freight to your customer, but instead of waiting for them to pay you, you sell the invoice to a freight factoring company who buys it for slightly less than the actual cost of your invoice. This way, you secure immediate payment for your service and you can settle your expenses without getting into debt. It is then left to the factoring company to collect your payment from your client.
This can be a business saver for smaller freight companies that need the cash to remain afloat.
How Freight Factoring Works
Freight factoring is an easy process. And for most companies, these are the steps you go through:
- You deliver freight to the customer as usual. You give them a copy of the Bill of Lading so that they know what they’re expecting to pay.
- Submit a factoring application to the factoring company. On approval, the company lays out a factoring contract.
- Once you both agree on the fees, you submit your bill of lading or invoice to the company for factoring.
- After doing some risk assessments, the factoring company pays you the value of the invoice minus their charge.
- After getting paid, you have no business with the customer anymore. It is now the responsibility of the factoring company to collect payment from your customer.
Assume the value of your invoice was $100, the freight factoring company pays you $98 cash. The $2 is the factoring charge.
Recourse Vs Non-Recourse Freight factoring
Have you considered the chance that your customer pays extremely late or doesn’t even pay at all? What would happen to the money you already collected from the factoring company? This is where recourse and non-recourse factoring come in.
Recourse factoring is a clause in the contract between you and the freight factoring company that empowers them to take from you should your customer pay late or not pay at all. Non-recourse factoring, on the other hand, means the factoring company will not take anything from you if your customer goes out of business or is bankrupt before they pay.
It is important to note, however, that non-recourse factoring doesn’t completely exempt you from taking the blow when your customer fails to pay. It only protects you when the customer goes out of business or is bankrupt, which is very rare.
Freight factoring companies always have this clause in their contract, so be sure to know what recourse actions your freight factoring company may take.
Haulpay by comfreight, is a great example of a non recourse factoring solution that we refer all of our readers to. Click here to check out what they have to offer and schedule an intro call.
How is Freight Factoring Different From a Bank Loan?
Freight factoring is very much different from a bank loan because in bank loans, you’re borrowing the money you don’t have. But with freight factoring, you’re only getting paid quicker for a service you already rendered.
Another difference between freight factoring and bank loans is that with bank loans, you’re paying the bank what you owe with interest, while freight factoring does not involve you paying the factoring company anything but the factoring charge.
Bank loans may also require a lot of document filings and often last forever. While freight factoring companies can usually settle you within two days.
How Much Do Freight Factoring Companies Charge?
Freight factoring companies often charge anything from 1 to 5% of the invoice value. And some factors that a factoring company considers before charging you are:
The type of freightHigh-value freights might cause the factoring company to bloat your charges a little.
The collection periodIf you agreed with your customer to get paid within 30 days, your factoring charge would be lower compared to if you agreed to get paid in 90 days.
The amount in dollars you factor each monthThe more you factor, the less the company is going to charge you per invoice.
The concentrations of your customerFactoring companies like to see that your customers are diversified enough. Imagine 90% of your customers are in construction. This means it could take longer for the factoring company to get paid if there was a major scarcity of an important raw material that affects the construction sector. Your factoring company may then increase your charge to cover the potential risk.
The Freight Factoring Company You Can Trust
Having worked with some freight factoring companies in the past, we understand the importance of ease, flexible contract terms, and expertise on the side of the factoring company. And as simple as these three things look, not many factoring providers can boast of them all. But of the few that actually do, HaulPay has our vote, and here’s why.
The complete automation of the freight factoring process with HaulPay simply means you can sell your invoices without leaving the comfort of your office and still get paid within 24 hours. HaulPay also offers its customers a free platform where they can check the credit records of their potential customers. This way, you know who to do business with and who to avoid. And this may protect you from the recourse clause of the factoring contract.
Another enormous benefit HaulPay has over many other factoring providers is that registration is seamless. You can get started by clicking HERE.
Most trucking businesses have freight factoring to thank for the rapid growth of their businesses. That they can sell their invoices, get paid quickly, and have enough cash to settle the daily needs of their businesses has been a game-changer.