Whether a carrier or owner-operator in the trucking sector, you’ve undoubtedly encountered significant cash flow gaps between deliveries. In reality, the industry average is 30-45 days to get money, with some taking up to 90 days.
While this is typical for business-to-business transactions in any industry, it does not excuse carriers and owner-operators from suffering. With gasoline costs, vehicle upkeep, and monthly bills, carriers may find it difficult to wait weeks for payment for a task that has already been accomplished, not to mention the time and attention necessary to guarantee each invoice is paid.
So, what’s the answer?
Freight factoring has always been a part of the trucking industry, and as growth patterns continue to change the sector and attract new drivers, an increasing number of businesses are resorting to freight factoring to be paid faster. This implies that carriers and owner-operators have many factoring providers to choose from. With so many alternatives available, it can be difficult to filter through the clutter and discover the best solution for your requirements.
Read on to learn more about factoring and how to choose the right factoring company as a freight broker.
What Is Freight Factoring?
Freight factoring is invoice factoring for freight brokers (also known as trucking factoring). Factoring (also known as invoice factoring) is a financing practice in which a firm transfers its outstanding bills to a third-party factoring company in return for the majority of the invoice’s value (often 75 – 85%) being paid beforehand.
When the firm’s client pays the invoice, the factoring company pays the remaining money to the first company. (minus its fees).
Factoring occurs in a variety of sectors. However, freight factoring companies are experts in freight brokerage. They are familiar with shippers’ and carriers’ average costs and payment conditions, as well as demand and rate variations, goods invoices, and so on.
There are certain differences to factoring in general that is worth mentioning. These include:
- Recourse factoring- If the client does not pay, the firm is accountable for the invoice’s value.
- Notification factoring- The company’s client is informed that the invoice is being handled by a third-party factoring provider.
- Non-recourse factoring- If the client does not pay, the factor is accountable for the invoice’s value.
- Non-notification factoring- The client is not informed of the involvement of a third-party factoring supplier.
How Does Factoring Work?
Interactions between three parties occur during the freight factoring process: you (the freight broker), your customer, and the factoring firm.
You transmit your invoice to a factoring business, which pays you (for example) 85% of its value within 24 hours of receiving it.
This advance is used to cover company expenses. Your client pays the factoring business the entire amount 30 days after you issue the invoice. The factoring business keeps its discount charge (often 3% of the entire invoice amount) and service fee (2%) and provides you with the remaining 10%.
How To Choose the Right Factoring Company?
As a freight broker, you would always want to choose a factoring company that can pay you quickly. But there are various factoring providers in the market. So, you need to be careful when selecting one for your company. Here are some things to think about while selecting a factoring partner.
- Getting fast cash
The top truck factoring companies can earn you cash in as little as a few hours. You must choose a new factoring firm if you’re presently factoring loads but aren’t receiving payments within 24 hours. Choosing a good factoring company should help you speed up the process.
- Approval is easy
Working with a truck factoring firm should be quick and simple. Even if you’ve been turned down by traditional lenders, the finest freight factors should be able to approve you as long as your clients are creditworthy. Many trucking factors do not charge application fees. So, if you don’t want to pay a startup charge, know that many factoring firms don’t.
Since the logistics industry is a close-knit one, if you’re unsure about which factoring business to hire, you can always ask others who have been in a similar situation to see which providers they choose. You can then compare it to others and select the one that is best for your company.
Freight brokers have certain requirements and should search for a factoring company that understands their industry. You will have different requirements than carriers seeking factoring. Choose a few factoring providers that fit your requirements and compare them. Finally, select the one that offers the most advantages.
- Based on factoring type
The two most popular forms of factoring are recourse and non-recourse. Non-recourse factoring means that the factoring business bears the majority of the risk of your client’s failure to pay. This is deceptive since non-recourse may not always shield your organization from all risks. Non-recourse factoring normally comes with severe terms, and the instances in which you are not liable for client nonpayment are limited.
- Personal touch
You do not do business with a firm, but with people. A reputable truck factoring company will give you a personal account manager to help you maintain things and ensure that they are working properly. Any questions you have should be answered by the account manager. You are, after all, paying for the service.
- Contracts should be flexible
Understand the contract details before signing a factoring agreement. Find a factor that provides a month-to-month deal if you don’t want to be trapped in a year-long contract. Several truck factoring firms provide this kind of flexibility. So, choose wisely.
- Type of Fee
Flat and variable fees are frequently used. Variable rates change in response to your demand. If you use volume flex variable rates, for example, you’ll pay less the more you sell. Rates might also be linked to prime rates, which means you’ll pay more if your factoring firm pays more.
As a freight broker, you play an important role in ensuring that the world’s cargo arrives at its destination. This must be accomplished in a fragmented yet rapidly expanding market while maintaining a balance between shippers and carriers and adjusting to unanticipated external events. Using a factoring company is a method for coping with this unpredictability. It can help you enhance your cash flow and free up resources. With the above-mentioned tips, choose the right factoring company for your firm.