4 Things Truckers Need to Know About Freight Factoring

Featured image by DistelAPPArath on Pixabay

When you own a freight company, you may want to consider freight factoring. This means hiring a company or service provider to help you streamline your cash flow. That way, you can focus on other aspects of your company instead of learning the ins and outs of financial management. But before hiring, it’s best to understand what freight factoring is by knowing the following things:

1. Concept and Process of Freight Factoring

Freight factoring is specifically designed for the operation of the trucking industry, and it’s been used longer than you’d think. But, you shouldn’t mistake it for a loan. That’s because freight factoring is the process of trading pending freight invoices to a specific factoring company so that you can get a maximum cash advance of 98%.

Compared to traditional financing, its process is a lot simpler. The processing of the truck factoring applications takes place in a short period. Once the application is processed, cash is given in as quick as 24 hours.

For an overview, here’s what happens when you use the services of a factoring company or factor:

The driver will carry and deliver the loads for the customers.
Then, you can send the invoices to the factor. And the factoring company will verify the freight bill.
Next, the company furnishes a certain percentage within 24 hours.
Lastly, the factoring company gets the payment from your client.

If you’re planning to apply for freight factoring, all you need to do is fill up the application. Then, attach and submit it together with the following:

Insurance proof
Operating authority

2. Factoring Terms

Knowing what and how freight factoring works is not the end of it. You must also familiarize yourself with factoring terms so that you can understand them better when you’re ready to hire a factoring company. With such, here are some terms you should be familiar with:

Recourse: It refers to the number of days before an invoice is charged back to you. Generally, 90 days are the typical recourse days.
Account Debtor Limit: It refers to the amount extended by the factor for every customer they make invoices to.
Credit Limit: This refers to the initial amount designated by the factor to extend to the supplier or the company.
Factoring Fees: It refers to the discount fee charged by the factor based on the agreement.
Reserve: It refers to the held-back proceeds to cover chargebacks or off-sets
Advance Rate: It refers to the initial amount received for each invoice.

3. Your Options

Like other financial assistance, freight factoring offers options. You can choose either of the two factoring plans:

Recourse Factoring: This factoring plan includes the risk of non-payment of your clients. For instance, you send an invoice. The factoring company then gives the advances. However, for some reason, the customer fails to pay.

In this case, you shall be responsible for the cash advances as well as the associated fees. But since you welcome the risk of this plan, you can have a reduced factoring rate.
Non-Recourse Factoring: With this plan, the factoring company accepts any chances of dealing with customers who can’t pay because of bankruptcy or insolvency. Compared to the recourse factoring plan, this plan makes you pay the factoring fee rate a bit higher.

For instance, you send the invoices, and the freight factoring company gives you a cash advance. If the customer doesn’t pay, the company has no choice but to take the blame. Here, you’re not obliged to pay the advance you’ve received. However, if the customer can’t pay due to freight claims or other issues, you must settle the advance given by the factor.

Which Option Is Better?

The answer depends on your experience and preferences. If you still have limited knowledge about trucking, there’s a good chance that you’ll be unfamiliar with handling various customers. As such, you may feel hesitant hauling loads for them. In this case, you might find it practical to choose the non-recourse factoring plan. Although it comes with a slightly increased rate, it can protect you against the risk of encountering bad credit customers.

However, if you think you’re already familiar with your customers, recourse factoring may be better. Since you know that your customers have a good reputation for financial obligations, availing of the reduced factoring rate may be less risky.

Overall, choosing the best factoring plan relies on your customers’ creditworthiness and risk tolerance. The two plans may exhibit some advantages and disadvantages. Nonetheless, both aim to address the concerns of truckers having insufficient cash flow.

4. Benefits of Freight Factoring

Most importantly, you should know the benefits of freight factoring. That way, you can make an informed decision on whether you need a factoring company’s services. Here are some of them below:

Improve Operational Performance: You need a steady cash flow to keep your operations running smoothly. With cash advances from a factoring company, you can make timely repairs. This results in preventing issues that may worsen if left not repaired. As it can shorten the lifespan of your vehicles, it can impede your business operations.
Keep Driver Compensation Flowing: Since some of your customers may not quickly pay their dues, you’re more likely to delay payments of your drivers. As a result, they can file union grievances that can endanger your business. Thus, freight factoring can help you avoid such since you have cash advances to pay your drivers on time.
Establish A Steady Supply Chain: You also need to take care of your supply chain. When your supply chain breaks down, you may have to stop some of your operations. But when you have a steady supply of cash, you can also have a regular chain of supplies.

Conclusion

Freight factoring can be valuable for truckers, especially if you’re just starting. Since you need to establish your business, you must have a steady source of cash. That way, you can continue operating even if your customers have payment delays. You can check if factoring is what you need based on the information above.