First, the common question: What is factoring? Factoring is financial transaction is a type of debtor finance where a business sells invoices, or accounts receivables, to a third party. This third party is called the “factoring” company. Businesses choose to factor their invoices to free up cash they are wait for a shipper to pay on.
There are many terms that explain factoring and many different types of factoring. Forms of this type of asset-based lending have been around for a long time and exist to provide cash-flow solutions for companies who need money in a pinch. For the trucking industry, however, there is only one that counts: Freight factoring.
One thing to note, however, is that freight factoring is not the same as “invoice discounting.” Invoice discounting involves a form of borrowing that uses the assets related to the invoice as collateral on the loan.
There are generally three parties directly involved in a freight factoring situation, with one being the factoring agency themselves, the party that sells the receivable (or invoice), and the debtor with the responsibility to pay the financial liability (usually the shipper or receiver). The invoice itself is considered a financial asset. When the party that sells it passes it on to the factoring agency, they generally take on the responsibility associated with collecting on the financial asset.
The deal is sweetened by the selling party, who generally sells the invoice at a discount or with an associated fee to get the cash they need. This part of the transaction provides the incentive for the deal. Factoring is used in many industries, from manufacturing to trucking.
There are essentially four distinct aspects to the factoring transaction:
- Includes the fee or discounted price paid to the factor.
- Any interest included by the factoring agency in exchange for the liquid asset.
- Any related bad debt expense associated with receivables that remain in place or uncollectable by the factoring agency.
- Any assumed credit risk, holdback receivables, or any other amounts required to cover unpaid or other types of merchandise returns. The factor’s profit can be gleaned from the difference between what it paid for the accounts receivable and the money it receives from the debtor party.
Factoring is used as a method to obtain cash. Whether it be to finance to equipment purchases or cover an existing cash gap, the factoring method can be quite popular. But the question or most companies who are considering factoring as an option is what they can expect when they choose to factor.
What to Expect from a Freight Factoring Provider
Not all freight factoring providers are created equal. They often provide different terms depending on the company. For those looking for really good factoring terms, there are specific items to look for.
First, does the factoring offer free credit checks or provide their own self-funding? These are important to relieving the burden on the party selling the invoice. Flat rate fees on invoices that have already been billed are also quite convenient. Low fees of around 2% can save a motor carrier big on the receivables they want to factor. Fleets should also be able to rely on fast and reliable funding, as well as both recourse and non-recourse factoring options.
Even better, does the factoring agency offer no monthly minimum volume fees? Companies that have been in the business for a long time often offer free online account management options through web portals, many times with always-on 24/7 access. Even better, some factoring companies provide load board access, fuel card discounts, and mobile app technologies with image capture abilities so that motor carriers they partner with can send invoice images digitally.
Freight factoring companies that go above and beyond won’t leave trucking companies to merely fend for themselves. They should offer highly experienced account executives to help manage your account. Furthermore, their low, competitive rates should be paired with same-day or next-day funding. When a trucking company needs their money in a pinch the factoring company should be able to come through.
They should also sweeten the deal with no long-term contracts or termination fees. Trust between parties is essential in any business relationship. When it comes to collecting on the accounts receivable, does the factoring company utilize professional collections options?
The Expected Process When Factoring
When a trucking company first reaches out to the factoring provider, they should reach a knowledgeable sales team ready to answer all their questions and address any perceived or unperceived needs. They should be able to go into great depth on how freight factoring works and be fully prepared for any “what if” scenarios.
Can they come through with paperwork and account management options? You can also glean a lot from what a factoring company has to offer through their application, both what is on it and the overall process. Once you have signed up, it is important that they put you in touch with a personal account executive.
Freight factoring companies will generally encourage their clients to complete a credit check on each of their customers so that they can get up-to-date information on who they should do business with. After all, the freight factoring provider wants to take on as little risk as possible, and so should the trucking company in question.
The factoring entity should also provide options to send either the proof of delivery (POD) or bill of lading (BOL). Your account management contact should be able to enter and scan invoices or provide you with a way to get them over digitally. When it comes to getting you your money, whether it is same-day or next-day, it is important that they offer many different options, whether it be via ACH, wire transfer, a physical check or a direct deposit.
One of the most important aspects of freight factoring is how the factoring agency treats your customers. If you want to keep your clients happy and coming back, it is important they are treated well, even when they owe money. Will your freight factoring partner treat your customers with respect? It is critical that they do so.
When they collect on your invoices, it frees your company up to do what it does best, which is keep vehicles on the roads and keep freight moving. A solid freight factoring company will have build a reputation and good relationships with brokers, shippers, and freight forwarders across the country. They should be a preferred factoring provider, even with those they are trying to collect from.
There is a term for collecting accounts receivables in a respectful way: Soft collections. You want your freight factoring partner to deal with your customers in a professional, courteous, and non-threatening way. Factoring agencies should provide debtors with different ways to get their invoices paid. When payments are made easier and faster, everyone wins.
The Many Reasons Fleets Utilize Factoring
The reasons motor carriers may use freight factoring are many. The most common reason is because new or small trucking companies may not qualify for traditional bank loans to cover their expenses while they wait to get paid. While freight factoring companies look at credit as a factor when doing business with a motor carrier, it is not the only factor.
Freight factoring companies collect directly from brokers and shippers, so it is your client’s credit they care more about than yours. So, if your fleet has less-than-stellar credit, that is generally okay in the eyes of the freight factoring provider.
Many companies may also have large freight invoices. With such a large amount of cash flow outstanding, freight factoring agencies can help make up the difference. When the money comes in right away, there are less impacts to the bottom line.
Another consideration lies in many fleets’ inability to collect or provide credit services. Small fleets and owner-operators likely do not have large back office teams. When clients pay late or don’t pay at all it can be a time-consuming and expensive issue. Collections work isn’t easy and often requires a large operation to follow through on the necessary steps. If your company doesn’t have the infrastructure to do so, a freight factoring company provides the answer.
Finally, factoring agencies often offer discounts for small trucking providers. It can be hard for small operators to get big fuel discounts or other types of breaks on every-day trucking items and equipment. Good freight factoring companies can offer more than just ways to cover your cash flow needs, they can also offer savings on everything from fuel to tires and truck maintenance.
The fact is, there are many different factoring companies and providers that can provide you not just with the cash you need to keep your operation running, but with lots of other side benefits as well. So, what are you waiting for? If you are looking for a solid freight factoring partner, keep these considerations in mind and then start your search.