Understanding Freight Factoring: Everything You Should Know
If you work in the trucking business, you might have heard the “freight factoring” term thrown around quite a lot. The service is a popular way for trucking companies to dodge gaps in their income, but many business owners still don’t understand what it is and how it works. Luckily, this post details everything that you should know.
What is freight factoring?
Freight bill factoring is business financing in the transportation industry. In this case, a company makes its delivery, but instead of waiting for payment, they transfer the invoice for the delivery to a third-party company. The company buys the invoice for a lesser amount than the total owed for the job, but they make up for the difference by paying immediately. With money at hand, a trucking company can go about its business as usual, while the third party company does all the waiting.
How does freight factoring work?
Quick payments are vital to running a successful trucking business. Factoring works by sending your invoices to your ideal factoring company the day you deliver your order. Instead of waiting for weeks, they process it and get you paid right away. This way, you always have the capital to keep your trucking business moving forward.
This technique works because there is an incentive for all the parties involved. The incentive for your company is the immediate payments instead of the long waits. For the factoring company, it is the percentage they charge when buying your invoice. This percentage translates to the profits they collect from your customer. For the customer, the incentive is the ability to deal with a company with the financial collateral to wait for a payout.
What are recourse and non-recourse factoring?
Similar to other financial assistance fields, freight factoring also offers you options. These are recourse and non-recourse factoring. Recourse factoring means you’re responsible for the unpaid invoices. For instance, you can send an invoice, and the factoring firm gives you the advances, but the customer fails to pay. In such instances, you will be responsible for the cash advances and the associated fees. However, welcoming this plan reduces the factoring rate.
In non-recourse factoring, the factoring company shoulders all the risks of unpaid invoices. They accept the chances of dealing with customers who cannot pay due to insolvency or bankruptcy. However, if the customer fails to pay due to freight problems, you have to settle the advance given by the freight factoring company. Further, the non-recourse factoring plan requires you to pay higher factoring rates.
The Bottom Line
Freight factoring can be valuable for your trucking company, especially when you are just starting. This is because it provides a steady source of income to help establish your business. This way, you can have improved operational performance, keep driver compensation flowing, and establish a steady supply chain. If you are within Redondo Beach, CA, and the surrounding areas, you can take your business to the next level with Business Factors & Finance. You can get in touch with us, and we’ll get you started now.