Stuck in a financial rut with no financial options left? For trucking companies in need of urgent financial help, freight factoring may be something to consider.
Not sure what that is? Let alone, if it's right for your financial situation and business?
We've got you covered; read on to learn trucking factoring basics including what it is and the pro and cons that come with it.
Freight Factoring Explained
One thousand of the biggest public U.S. companies took an average of 56.7 days to pay their bills in 2017. This is up 3.4 points from the year before (2016).
So if you're waiting for that invoice two months in you're not alone. With operating costs adding up, a walk to the bank for a loan may seem like a good idea.
As Syracuse University professor, Kenneth Walsleben, told the New York Times (NYT) going to your local bank for a loan are long gone.
He tells NYT that small business now can turn to more creative lending options, many of which are more expensive than traditional loans. With time and more demand for creative lending, Walsleben mentioned to NYT that some of these alternative loan options have gone down.
The key word to remember? Some. What does this mean if you're looking for an alternative loan? Research, research, research. (But we'll talk more about this later.)
Some types of alternative loans borrowers can search for include lease-back and nonbank loans, peer-to-peer loans, asset-based lending, and, yes factoring, plus more.
So What is Freight Factoring?
Freight factoring is a type of alternative financing.
Trucking companies that are stretched thin can sell a part of their invoices to a third party (aka a factoring company).
In a couple of days, the factoring company gives the trucking business a percentage of the invoice value.
This is the biggest perk considering trucking companies might wait a couple of months before receiving that same money from the client (but read on, there's more).
Once the clients pay the invoices, the factoring company gives the trucking business the balance. The trucking company also pays a factoring fee or transaction fee.
The Trade-Off: How Much Do Factoring Companies Cost?
Is it cheaper for trucking companies to wait for the customer to pay the invoice? Yes.
But, waiting for 14, 30, or 60 days for that paid invoice may not be an option for trucking businesses neck high in utility bills with payroll coming around the corner.
Here's the trade-off: You pay more for access to available funds right away. Or, you save more and wait for clients to pay.
Who is Trucking Factoring For?
Like most forms of alternative loans, freight factoring is a financial option for trucking businesses that are out of options. They've repeatedly applied and have been denied for traditional loans from banking institutions.
They've opened up and maxed out several lines of credit, and have played the credit card game of opening and maxing cards.
Family and friends already have donated or loaned their business money and don't have any more money to give.
With operating costs stacking up and a pile of overdue bills that still need to be paid, such trucking operators are out of traditional and less expensive options.
On the edge of bankruptcy, freight factoring may be an option for trucking companies to consider.
Think of it as a temporary, financial crutch to help your business get back on track.
A Possible Option for New and Seasoned Trucking Companies Out of Financial Options
Load factoring can be for new trucking companies just starting, that need financial help with start-up costs.
They can't get a traditional loan and have already bugged family and friends for donations and loans. Let alone, they've depended on credit cards to get them by the start-up phase but have little to no available credit left.
It can also be for more seasoned trucking businesses that want to expand and need help to make up the financial gap. Like with the start-ups, they've explored traditional financing and are out of short-term options.
Thinking of Freight Factoring? Some Things to Consider
For those interested in load factoring, here are some basics you need to know.
1. Shop Around
Be it auto insurance or a personal loan or freight factoring, shop around. Get quotes from at least three, if not four factoring companies. That way, you can compare each and choose the one that best fits your financial and business needs.
2. Do Your Research
Check the Better Business Bureau (BBB) to make sure the factoring company is legitimate and has good reviews.
Search other review sites and see what prior customers have said about their service. Also, become familiar with basic factoring terms like the difference between recourse factoring and non-recourse factoring.
Just like with negotiating a car, why not use your research and many quotes as negotiating chips to help you secure a lower factoring fee?
3. Know What You're Paying For
Does the factoring company offer non-recourse factoring, recourse factoring, or both? Which do you prefer?
A quick look in the Factoring Glossary and you'll see that recourse factoring is a type of factoring where the third-party company does not pay up if a customer defaults on their invoice.
Non-recourse factoring is the opposite. When customers default on their invoices, the factoring company takes the loss. Meaning, the trucking company won't absorb that loss of cost.
Usually, non-recourse factoring is riskier for factoring companies. Trucking companies that choose this type of factoring can expect to pay more.
Also, according to the Trucker's Report, ask factoring companies what expenses your company will pay. Some factoring companies may only charge a factoring fee.
But don't be surprised if there are other costs tacked on.
The Trucker's Report also encourages trucking companies to ask about if the factoring company charges per load. A per load basis may be a better choice for trucking companies that don't want to have all their invoices go through the factoring business.
Other topics to ask the factoring company include:
- Downpayments
- Interest rates
- Credit scores
- Contracts
The Takeaway
Without other financial options, freight factoring can be a great temporary financial cushion.
If considering this, make sure to do your research, talk with your attorney, and secure several quotes. Have any more factoring tips? Leave a comment below. Any questions? Feel free to contact us today.