The down economy is hurting almost every business in the United States and trucking companies are particularly affected because of high fuel and insurance prices. Freight factoring is one of the ways that trucking companies solve the problem of not having a consistent cash flow.
What is Factoring?
A factoring company is a financial business that buys your accounts payable invoices and gives you the amount of money that is owed to your company after subtracting their fee. This fee ranges from about one percent to more than five percent. The factoring company then collects the money from the people who owe you money. They will usually require you to pay back the money if they are unable to collect on the invoice after a certain number of days. Be sure to read the contract carefully before working with any factoring company.
Pros of Freight Factoring
One of the biggest advantages of entering into a factoring agreement is that the factoring company pays you within a day or two of receiving the invoice you send to them for payment. Receiving the money immediately helps you meet expenses and predict your business’ cash flow. This allows you to focus your attention on acquiring new clients and planning loads instead of collecting on invoices and doing paperwork. Factoring allows you to generate cash flow with no collateral except unpaid invoices. It is much simpler than asking the bank for a loan and the fees are likely to be less costly.
Most factoring companies will handle your entire accounts receivable so that you don’t have to spend any time or money collecting money from clients. They charge an extra fee for this, which may be a flat fee or a percentage of your total invoice amounts. This arrangement is usually more beneficial to your company than a traditional bank loan where you have to worry about monthly payments and interest rates. The factoring company takes out their fee automatically before sending you the rest of the money either by check or electronic deposit.
Cons of Factoring
There is a large difference between factoring companies, so it is very important to talk to several factoring companies before deciding which company to work with. The company you choose should have a good reputation for making payments on time and not charging hidden fees. You should also make sure that the factoring company isn’t keeping a larger than necessary amount of your money as a shield against unpaying clients. Most factoring companies know that you need them because you have a very thin profit margin and they may try to take advantage of this fact.
The factoring company you work with should handle your accounts payable efficiently and treat your clients with respect. Some factoring companies have strict deadlines and hefty late fees, making them difficult for your clients to work with. Some of your clients may not like the idea of working with a third party instead of paying you directly. It is best to talk to your clients about the situation before they receive a bill from the factoring company so that they understand how you have chosen to run your company and are not surprised with an unexpected bill.
Factoring your freight bills is a great way to take control of your company’s cash flow as long as you choose your factoring company carefully. The best way to do this is to take all of the pros and cons into consideration before deciding that you want to work with a factoring company. The next step is to read reviews and talk to several company owners who have used a certain factoring company to ensure the company you choose is reputable.