Trucking factoring is when a factoring company purchases one or more invoices from a trucking company at a discount and collects payment from the customers on those invoices. The arrangement creates an immediate source of cash inflow for the trucking company. In a freight business, the amount of cash required at any point in time is dependent on the amount of cargo it delivers. It can be challenging to estimate. If a trucking company has enough positive cash inflow, it can continue to pay its employees and meet all other obligations.
The payment time lag in the trucking business
The trucking business basics are that the trucking company picks up the goods at one location and delivers them to the next assigned location. The shipper or broker pays for the trucking company’s delivery services. However, the trucking company does not get paid immediately. The industry-standard average for payment of invoices is around 30%, extending up to 90 days to pay invoices. This time lag for the price could lead to a shortage of cash.
With trucking factoring, the trucking company can get paid almost immediately. The method is that after the trucking company receives the invoice, it can outsource the collections process to a third-party trucking factoring company. The trucking factoring company buys the invoice from the trucking company at a marginally reduced rate. This enables the trucking company to focus on its core competency of hauling loads rather than engage in collecting payment.
This also maintains the favorable cash flow situation of the trucking company as they get an immediate price from the trucking factoring company against the invoice. Trucking factoring maintains the cash flow of a trucking company by making faster payments to the trucking company.
What happens when the end user does make a payment to the trucking factoring company?
There are two types of trucking factoring. A non-recourse trucking factoring company protects the trucking company in case of the customer’s inability to pay due to financial insolvency, bankruptcy, etc. However, in the case of recourse trucking factoring, the trucking company has to bear the risk of nonpayment by the customer.
In the event the customer does not make a payment to the truck factoring company against the invoice, the trucking company has to pay the factoring company. This makes the non-recourse factoring option the safest for the trucking company. In this case, the trucking company doesn’t have to pay the invoice amount to the factoring company even if the factoring company does not get paid by the broker or shipper. This also makes non-recourse factoring the safest and most expensive of the two options.
It is essential to make a necessary decision when choosing a factoring company.
Trucking factoring companies do the vital job of providing ready cash for trucking companies by actually buying the trucking company’s accounts receivable at a discount. The size of that discount is one of the critical factors to consider when choosing a factoring company for trucking.
Factoring companies usually base their discount rates on a variety of factors. The first factor is whether the factoring is recourse or non-recourse factoring. The credibility of the customer is also an essential factor. The total volume of business vis-à-vis the total amount of the invoices submitted by the trucking company to the factoring company is also considered.
It also matters whether the trucking company intends to pay a fixed percentage as a flat factoring fee for every invoice or a tiered factoring fee wherein a lower fee on invoices that pay quickly and a higher fee on invoices that pay more slowly is charged. It is vitally important for the trucking company to get offers from multiple trucking factoring companies and also carefully review the terms of the factoring agreement before making a choice.