Importance of freight factoring in the trucking business

Importance of freight factoring in the trucking business

Freight factoring involves the selling of invoices by trucking companies and brokers at a discount for immediate cash. From the sale, trucking businesses and freight brokers get up to 95% of the invoice value they sell.

After the payment by the client to the factoring company, the trucking business gets the remaining amount with the factoring company’s fee deducted. The cost ranges below 5% of the initial invoice value. This helps in funding operations of the company as well as growing the business.

Amy van ness a controller at freight center argues that both small-sized companies and large-sized companies are either looking of cash flow or efficiency. They both need freight factoring loans to manage their payment and ease the duties of communication.

Fees and rates in freight factoring

  • Factoring advances. This is the percentage of the invoice value the fright company gives you in advance. Different lenders have different amounts depending on your credit history and negotiations. Some may offer only 60% while others may offer 95%.
  • Factoring fees. Various freight factoring companies have different levels of charges. Depending on the kind of agreement and relationship with the company, other charges may arise as well. Such costs include an origination fee, contract termination fee, wire transfer fee among others.
  • Factoring rates. Factoring companies being profit-making firms, they usually charge some amount per invoice factored. Larger companies are charged differently from small companies depending on agreement terms.

Recourse factoring involves situations where your company is responsible in cases where clients don’t pay. Your company buys back the invoices when such situation arises.

On the other hand, non-recourse factoring your company bears no responsibility if customers don’t comply with payments. Charges in this model are higher due to covered risks.

Some examples of freight factoring companies include paragon financial group and blue vine which offer non-recourse factoring. Many trucking companies opt for freight factoring loans as they are easier to acquire than traditional loans. Freight factoring companies look at creditworthiness rather than credit.

The advantages of freight factoring

  • Quick funding. Almost 80% of all freight factoring companies provide funds in as little as one day for factored invoices.
  • Flexibility. There is no limitation for invoices you want to factor.
  • Plenty of options. In freight factoring, one can decide to use recourse or non-recourse factoring. This allows lowering of risks.
  • Qualification is simple. There are few business requirements because freight factoring only depends on the worthiness of the business.

Disadvantages of freight factoring

  • There is very little involvement in your business during the payment process. Invoices are paid directly to the factoring company.
  • Discount rates make it expensive. A percentage of the payment goes to the factoring company which reduces earnings.
  • Risk of increased costs if clients fail to pay. In recourse factoring, you are required to repurchase the invoices if clients don’t pay.

Freight factoring loans help reduce the gaps in cash flows which improve business operations. The business runs efficiently outside the constraints of spare cash.

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