What Is Freight Factoring? The Ultimate Guide (Plus Tips & Tricks)
Are you stuck in a financial rut and don’t know where to turn? For trucking companies in need of financial help, freight factoring may be something to consider.
If you aren’t sure what that is or if it's the best solution for your financial situation and business, we’re here to help. Read on to learn all about freight factoring, including the benefits that come with it and how it might be helpful for you.
What is Freight Factoring?
Freight factoring is a type of alternative financing for trucking companies. If a company is stretched thin, it can sell a part of its invoices to a third party, also known as a factoring company.
After a few days, the factoring company will give the trucking business a percentage of the invoice value and hold back a reserve until the invoice is fully paid by the trucking company’s customer (usually a 5-20% reserve). This is the biggest perk associated with freight factoring, since trucking companies might usually have to wait a couple of months before receiving that same money from the client.
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 fee is simply deducted from the face value of the invoices sold to the factoring company.
Some factoring services even offer the full face value
Who is Freight Factoring For?
Like most alternative loans, freight factoring is a financial option for trucking businesses that are all out of other options. They've repeatedly applied for and have been denied traditional loans from banking institutions, or they’ve opened up and maxed out several lines of credit and have played the credit card game of opening and maxing cards. Trucking companies on the edge of bankruptcy would also benefit from freight factoring.
In short, freight factoring is a temporary financial crutch that can help a trucking business needing to get back on track.
How Much Do Freight Factoring Companies Cost?
Is it cheaper for trucking companies to wait for the customer to pay the invoice? Yes.
However, waiting 14, 30, or even 60 days for that paid invoice may not be an option for trucking businesses that are neck high in utility bills with payroll coming around the corner.
Here's the trade-off: With freight factoring, you pay more for access to available funds right away. Or, you save more and wait for clients to pay. That’s a choice that a business in need will have to make.
The Benefits of Freight Factoring
While freight factoring might not be the best option for every business, there are many benefits associated with this solution, including the following:
- Improved Cash Flow: Freight factoring helps businesses to get paid faster for their delivered goods and services, allowing them to pay their bills on time, cover their expenses, and invest in their business growth.
- Reduced Administrative Burden: Factoring companies handle the administrative tasks associated with invoicing, collections, and credit checks, freeing up time and resources for businesses to focus on their core operations.
- Increased Access to Working Capital: Freight factoring provides businesses with immediate cash for their unpaid invoices so they can take on more loads and grow their business without waiting for customer payments.
- Better Credit Management: Factoring companies often perform credit checks on their clients' customers, which helps businesses avoid bad debt and minimize the risk of non-payment.
- Flexible Funding Options: Freight factoring offers businesses flexible funding options that can be tailored to their unique cash flow needs, including recourse and non-recourse factoring.
Thinking of Freight Factoring? Some Things to Consider
If you’re interested in freight factoring, here are some helpful tips you should consider.
1. Shop Around
Whether you’re looking into auto insurance, a personal loan, or freight factoring, you should always shop around. Get quotes from at least three companies, compare each, and choose the one that best fits your financial and business needs.
2. Do Your Research
Check online customer reviews to ensure the factoring company has good reviews. Also, it’s helpful to be familiar with basic factoring terms, like the difference between recourse factoring and non-recourse factoring.
3. Know What You're Paying For
Does the factoring company offer non-recourse factoring, recourse factoring, or both? Which do you prefer? After a quick look at the Factoring Glossary, you'll see that recourse factoring is a type 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.
Ask factoring companies what additional expenses your company will have to pay, such as:
- Down Payments
- Additional Interest Rates
- Credit Check Fees
- ACH Fees
- Contract Fees
- Early Termination Fees
Reap the Rewards of Freight Factoring With HaulPay
No matter the size of a company or how much it has grown, there is always room for technology advancements and optimization of processes. Every company strives for the best resources to drive growth and customer acquisition. Freight factoring can provide numerous benefits, such as increased cash flow, overall business growth, and reduced hassle of managing back-office tasks. HaulPay offering a digital invoice automation tool as well as non-recourse factoring with no hidden fees and no ach transaction fees. They just charge the flat % discount and pay you 100% of the rest of the invoice with no credit risk. To experience these benefits and achieve overall business growth, request a demo to see how the HaulPay platform works.