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

Factoring basically amounts to accounts receivables financing. It has become increasingly difficult for businesses, especially new ones, to obtain accounts receivable financing in the face of existing financial and banking practices in today’s cutthroat business environment. In this scenario, factoring offers the best alternative way, to obtain the necessary finance.

Freight factoring is a very important branch of the factoring business. The nature of the transportation business is such, that payment for the services rendered is received only after goods are delivered to the client. However, there exists a plethora of cash intensive expenses that all transporters must meet in course of their day-to-day business, whether they are owner operators or freight moving companies. They have to deal with this, irrespective of when their clients pay them, for which they are usually required to wait for anywhere from one to two months, after making the delivery.

These operational expenses include ready cash for fuel, lease/loan repayments, repairs and breakdowns, buying tires, paying drivers and other maintenance and daily expenses. This creates a fund crunch for the transporter /trucking company/freight brokerage agency, which is extremely difficult to overcome, especially when their requirement is an improved and steady cash flow. Bank financing does not offer a viable solution, as it is a tedious and time taking process, involving production of records supporting profitable business, performance in the past. This can prove very difficult for a new transporter or freight broker.

Therefore, if your freight handling/transporting business is at the growing stage and your customers are credit worthy, it is best, if you opt for factoring your invoices as a solution to have cash available to cover the recurring expenses of your company and allow it to grow at a healthy pace. With accounts receivable factoring, you will be able to convert your slow paying receivables into cash, as you get them financed through a reliable freight factoring company. It will provide you with a convenient and flexible line of finance, tied directly to your sales. In other words, the more you are able to sell to reputed and good customers, the more finance will be available to you.

Factoring your freight bills is a fairly simple process. You will first need to establish an accounts receivable factoring agreement with a reputed factoring company. Once this is done, you proceed with billing your customers in the usual manner, and in course of business and submit a copy of the bill to the factoring company for finance of upto an advance of 70 to 90 percent of the value of the invoice. This way you get immediate cash for taking care of your payroll and other expenses and can go ahead with growing and expanding your company, while the factoring company waits to get paid by your customer(s).

Once your customers pay the factoring company, it settles the transaction with you rebating any reserves after deducting its fee. What you need to understand is that credit-worthy customers are the most important consideration for factoring. Your standing with the factor depends on the quality of your customers. Servicing better quality customers will enable you to factor your invoices for a lesser fee and make more finance available to you.



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

Invoice Factoring Company