Invoice factoring is a financing tool that allows your business to use its outstanding invoices to generate cash quickly and avoid waiting up to 90-plus days for customer payments. Essentially, your business is selling its accounts receivable to a factoring company at a discount. In return, cash is placed in your business’ bank account in as little as 24 hours.
Freight factoring, also known as transportation factoring, provides trucking companies with the money and resources they need to manage their cash flow effectively, fund new loads and grow their fleet. Rather than chasing past due receivables, factoring allows you to spend more time and resources on hauling the next load. However, before your secure freight factoring services, it is crucial that you are aware of some common factoring mistakes trucking companies make.
If you avoid the following mistakes, it will ensure that you experience the all of the best benefits of an invoice factoring relationship:
Failure to read the fine print
The true cost of using invoice factoring services is a problem many business owners run into. For example, they think they are securing a 2% factoring fee, but are then charged more because they overlooked certain “hidden fees” in the fine print.
The key is to partner with a factoring company that is both reputable and transparent about all factoring fees and then go over every detail. While the factoring fee involved will vary from factor to factor, it tends to fall somewhere between 1-3%. In addition, advance rates typically range anywhere from 80%-95% of an invoice’s value.
Not doing enough homework on a factoring company
As you search for a factor to work with, keep in mind not all freight factoring companies are created equal. Some factors specialize in working with certain industries, so make sure the factoring company you choose has ample experience in working with the challenges trucking companies face. Additionally, it is also important to learn more about the factoring company’s reputation and how fast they provide cash.
A few other questions to ask yourself are can you easily get in touch with someone if you encounter a problem? Are you allowed to choose which invoices you wish to factor? Spend some time browsing online reviews to find out what other trucking companies are saying about a particular factoring company’s service and support.
Utilizing the wrong type of factoring
You may not be aware that there are actually two different types of factoring: recourse and non-recourse factoring. The main difference between the two is the amount of risk you are comfortable taking on and how likely your customers are to pay in a timely manner. In a non-recourse agreement, the factoring company assumes the risk, so you are not required to buy back unpaid invoices if a client fails to pay, in most situations.
Recourse factoring, on the other hand, provides the same services but responsibility falls on your shoulders if the factor is unable to collect payment. Ultimately, the decision between the two types of factoring boils down to your personal level of risk tolerance and the trust you have in your customer relationships.
Setting up the payment process incorrectly
Failing to have payment sent directly to the factoring company is a very common problem trucking companies run into, especially if they are new to factoring. Sometimes the shipper will unknowingly send your company payment for an invoice. However, since the factor has already purchased your invoice and paid you, this money needs to go to the factor.
The correct and simple solution to this is that you will need to contact both the factoring company and the shipper to correct the mistake and ensure payment is sent properly.
Not analyzing your trucking company’s specific needs
Above all, make sure you truly understand your trucking company’s situation and needs. Every business is unique and has different cash flow challenges. Before choosing a factor, ask yourself some key questions.
- Does the factoring company’s funding capability match your company’s rapid growth?
- Are you looking for assistance in other areas like maintaining records?
- Do you want to maintain the flexibility to choose which invoices you want to factor?
- When facing cash flow issues, how quickly do you need to secure capital?
Armed with this information, you are more likely to partner with a freight factoring company that best suits your specific business’ needs.
What are the Benefits of Freight Factoring?
If you have never worked with an invoice factoring company before, you may not know all of the benefits this financing tool has to offer.
Smoother business cycles
Factoring provides you company the cash fast and when you need it most. You can use factoring to quickly unlock cash your business has already earned to manage cash flow dips and economic downturns.
With Security Business Capital, you can have the cash in your business’ bank account in as little as 24 hours.
Simple approval process
Freight factoring is known for requiring significantly less paperwork and time, giving you faster access to your cash.
No added debt
Factoring is not loan. As mentioned previously, the factor is simply advancing money your business has already earned and is waiting to be paid, so you avoid taking on any new debt.
You can also secure help with many back-office tasks allowing you to spend more time on the road and less time dealing with accounts receivable and collections.
When Should Your Trucking Company Use Factoring?
Has your trucking company been struggling to meet the long list of expenditures that must be paid prior to any freight actually being delivered, like buying fuel and covering tolls? Would you like to build up a fleet of trucks and attract quality drivers, but lack the extra funds to do so? Are necessary expenses like truck payments, payroll and vehicle maintaince getting harder to cover?
If so, freight factoring can help you maintain the steady cash flow you need to effortlessly cover costs and jump at opportunities to expand.
If you are searching for an invoice factoring company, consider the dedicated team of professionals at Security Business Capital.
Based in Midland, Texas, Security Business Capital is a premier invoice factoring company with years of experience. We have built a dedicated team of individuals that specialize in providing flexible cash flow solutions that help businesses thrive.
To learn more about our freight factoring services, contact us today for a free quote and/or consultation.