If you are running a small to medium freight company, then you must be losing sleep, worrying about getting cash on time to meet your expenses and getting your payments from customers on time. This is where freight factoring can help your business go from slow to quick growth.

When you haul freight for your customer or freight broker, you would be issuing a freight invoice. You would then wait for 30 to 90 days depending on the credit given to your customer, for your payment to arrive. Freight factoring companies will “buy” this freight invoice off you and give you the invoice amount immediately. This payment will be in 2 installments. The first installment will be transferred to your account in 2 to 4 days and could be upto 90% of the invoice value. The 2nd installment will be the balance amount and will be transferred to your account after your customer makes the payment on the due date, minus the ‘factoring fees’.

This means that you get your money almost immediately after making the invoice and this ensures that you can meet your expenses with ready cash. This will enable you to pay off your fuel bills and salaries on time and also enable you to take on new and bigger hauls, thereby increasing your business. This will mean increased credit freight invoices and consequently more business for your freight factoring company, and again more cash payments for you. A winning combination indeed, but you should be careful about some points, while hiring the services of a freight factoring company.

The ‘factoring fees’ could be from 1.5% to 5% of the total invoice amount, depending upon various factors such as the credit period of the invoice, the credit rating of your customer as decided by the factoring company and the total volume of business, you give to the factoring company. So, if you are giving more than 30 days credit to a customer, who is rated low on the factoring company’s credit rating list, then the fees will be the highest.

That could reduce your profit margin substantially. The freight factoring company should also be able to handle your account efficiently and since they could also be taking over your payment collection from you, they would have to behave courteously with your customers or they could end up damaging your reputation and relation with your customer. Your customers will also have to be informed about your tie-up with the freight factoring company and some of them might not be very comfortable in dealing with third parties.

These problems could crop up, once you hire the freight factoring company. But, if you keep an eagle eye on their operations, you could quickly diffuse any tricky situation without ruffling too many feathers. Some factoring companies also offer ‘non-recourse’ factoring, whereby any customer defaulting on his payment will be the factoring company’s problem and not yours. This will help you in concentrating more on increasing your hauling business, rather than losing sleep over bad debts. However, any additional service including this one from the factoring company will cost you more. You will have to decide finally, on which services you would require from them and which you don’t.

So, freight factoring can be a boon for your budding freight business, but you should also understand the risks and charges associated with it.



Thanks to Kris Koonar for contributing this article to our Factoring blog:

Instant Working Capital

Business factoring is also known as invoice discounting, debt factoring, receivables factoring, among others albeit with a few small alterations. This is a very helpful financial tool for fast growing companies that have many credit clients in the pipeline, but not enough ready cash to service them effectively and meet business expenses effectively.

If you have many credit clients and are supplying products to them on a 30 or 60 days credit basis, then once you have dispatched your invoice, you would then have to wait for 30 or 60 agonizing days, until your payment becomes due. This effectively locks your own money and you might find that although your sales figures look impressive, your cash position might still be pathetic.

A business factoring company can then step in and save the day. These companies will ‘buy’ your credit invoices and in return will transfer the invoice amount into your account within a couple of working days. They will however, retain their factoring fee that could be anywhere in between 1.5% to 5% of the invoice amount based on a few conditions. This fee will be decided once the business factoring company checks the credit rating of your client, checks the number of days that you have provided as credit to your client and also checks the entire amount of business that you can provide to the factoring company.

The factoring company might also hold on to another 5% to 10% of the invoice amount, until the client pays the invoice amount on the due date. This money might get locked up, in case the client does not pay the invoice amount due to any disagreement. The factoring company might offer you the option of recourse or non-recourse factoring, which basically means that they could also take over the risk of collecting the payments from your clients at an additional charge. This means that even if your client fails to pay the factoring company on or after the due date, you will still not be at risk.

Business factoring can thus improve your cash flow dramatically and this will help you in meeting your business expenses, such as paying your suppliers and employees, and can even help in funding your business expansion plans. You can also buy your products in bulk by taking advantage of quantity or cash discounts. Business factoring ensures that you do not have to wait for the due date to approach to collect your payments, but instead can receive the money as soon as you submit the invoices to your factoring company.

If the factoring company has taken over your receivables, then you will need to inform your clients about your decision and you can then redirect your collection staff and your efforts towards increasing your sales figures. Once you talk to a business factoring company of your intention to tie-up with them, it normally takes around a week to verify the various facts and start the factoring process.

Thus, business factoring can improve your cash flow and also take on your collection hassles, thus becoming an extension of your business. By tying up with the right factoring company, you can both grow together, as your business increases along with the value of your invoices presented to them. Being highly flexible and practical, this method of financing can help you to maintain or increase your growth level, while enabling you to meet your expenses comfortably.



Thanks to Kris Koonar for contributing this article to our Factoring blog:

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