Factoring Service

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It’s challenging enough operating a business — especially a small one or if you’re just starting out — and maintaining a reliable, steady cash flow can mean the difference between sinking or swimming. Unpaid invoices throw a huge wrench into the works, especially if you depend on the incoming funds for payroll or rent. 

Truck factoring — also known as freight factoring — allows carriers and owner-operators to turn unpaid invoices into cash. Essentially, a third-party factoring company for trucking will effectively buy those outstanding accounts receivable at an advance rate of usually 80% to 90% of the value and then collect on those unpaid invoices themselves. Factoring in the trucking industry means someone else takes the risk of non-payment. For many trucking companies, even getting a discounted amount for invoices is well worth getting the factoring services for trucking companies since they have immediate funds with which they can pay overhead costs or even take on additional work to make more money.   

Your agreement for truck factoring services can be a recourse agreement or a non-recourse agreement. If you have a recourse agreement and your customers do NOT pay their invoices, you are required to buy them back. The trucking factoring company may even charge additional fees. If you have a non-recourse agreement, once the factoring company is assigned the unpaid invoices, they belong to the factoring company. If the clients don’t pay, it is no longer your problem. As a consequence, the rates charged by factoring companies tend to be higher for non-recourse agreements.

As with any important business decision, whether you decide to use a truck factoring service depends on your business model, scale of operations, and how much risk you want to assume.

Some of the pros of truck factoring include:

• Few qualification requirements – This type of invoice factoring revolves around how creditworthy your clients are, so you won’t have many qualification requirements.
• Almost immediate funding – Instead of waiting for the invoice due date to come and go before receiving the monies owing to you, you can get most of the sum upfront through the factoring company.
• The more your business grows, the more financing you can get – This is because the value of the invoices you assign determines the amount of your advance. So, as you get more established, your advances can become larger.

Some of the cons of hiring a trucking factoring company include:

• It can be expensive – In exchange for getting funds in advance through the trucking factoring service, you lose a portion of the sum owed to you (that is, the factoring company’s discount rate).
• It can end up costing more if your client doesn’t pay the invoice – If you have a recourse factoring agreement, you are obligated to buy back the invoice if the customer doesn’t pay, and you will likely have to pay a fee to the factoring company.

We’ve touched on a few of the benefits of factoring for a trucking company, but let’s break these down in more detail. It’s not unusual for drivers to feel a little reluctant to part with a portion of their profits, and this is a necessary fact of working with a factoring service for the trucking industry. However, the small amount of lost profit can actually lead to serious advantages for businesses and drivers and can even see you increasing your profits over the long term.

• Urgent capital upfront

There can often be a lag between taking on a job and then getting paid for it. While this is not always a problem — for example, while business is good and while company revenue is high — it can cause serious disadvantages for drivers in leaner times. It’s also not fair, as the truck driver has held up their end of the deal and has still not been paid.

With factoring, there is no such concern. Money is paid upfront by the third-party factoring company, and the truck driver receives their capital up swiftly and without delay.

• A more reliable source of revenue

Forecasting and projecting for the future can be difficult for truck drivers. Even when orders are coming in, it is likely that many of the payments on these orders will be delayed, meaning that drivers cannot predict precisely when they will receive the money that is owed to them. This is a major issue, particularly when it comes to securing loans or investment for business growth projects. To put it simply, a lack of reliability makes it hard for truck drivers and owner-operators to grow their business in the way they’d like.

With a truck factoring service, this uncertainty is removed. When taking on factored orders and jobs, drivers are securing a reliable stream of income. They can then use this reliable income stream to prove their annual revenue, which makes it easier to attract investors, qualify for loans, and expand the scope and capability of the business.

• Flexibility in terms of income

Some drivers may not like the idea of accepting a factored order. After all, when accepting this kind of order, the driver can only expect to receive around 80% or 90% of the total cost of the order, which may seem unfair as it is the driver who is doing the actual driving. However, the idea of factoring services for a trucking company or driver is that they accept this discounted rate so that they can connect with a more reliable payment.

This gives you flexibility as a truck driver or owner-operator. You can accept factored orders that provide you with a baseline of income — a regular stream of revenue that you can put your faith in. Then, you can enhance this revenue by taking on other orders at full payment. As your situation changes and you become more or less risk-averse, you may decide to shift the ratio one way or another — the choice is yours, thanks to this increased flexibility.

• Reduced risk

An unreliable payment schedule is one thing, but the risk of not getting paid at all is an even more serious concern for truck drivers. Disputes with clients, unscrupulous customers, and a whole host of other factors can contribute to the risk of non-payment. For small trucking businesses or for truck driver owner-operators, this can be catastrophic. Too many businesses have run into serious trouble because they cannot secure the payments they are entitled to.

This is obviously a major benefit for truck drivers. With a truck factoring service, the risk of non-payment is taken on by someone else. You do not need to worry about receiving the money due to you, and you can focus on other — more positive — aspects of running your business.