Truckers and shippers live and die by their cash flow, and in most cases, freight payment is the lifeline. The challenges associated with transporting merchandise and groceries across the country reduce the working capital of trucking companies as they struggle to pay the drivers, repair and service trucks, as well as other contingencies.
What is Truck Factoring?
Truck factoring is an effective financial management service that enables a trucking company to sell outstanding invoices to factoring firms and receive the optimum value for the invoices offered immediately. This enables businesses to acquire a lot of needed cash as early as now and not wait long for customers to pay their bills in 30, 60, or even 90 days.
How Does Truck Factoring Work?
Here’s a step-by-step breakdown of how a typical truck factoring transaction works:
Delivery of Goods:
After the delivery of the goods to the customer, the next activity that the trucking company can perform is billing.
Invoice Generation:
To the buyer, the trucking company prepares an invoice for the goods delivered, the services rendered, the total amount charged, and any other necessary conditions.
Invoice Submission to Factoring Company:
The factoring company is paid by the trucking company that presents the invoice to them. This is mostly done through a web-based application or even by a designated account manager.
Invoice Verification:
The factoring company where they sell the invoice checks to make sure that the information on the invoice is correct and that the customer has not made any complaints.
Advance Payment:
The factoring company then pays the trucking company an advance amount once the invoice has been validated. This usually amounts to 80-90% of the total invoice amount.
Customer Payment:
In factoring, the factoring company gets paid by the customer when the factoring period is due and disclaims the factoring fees.
Final Payment:
Thus, most of the invoice, less the factoring costs, is forwarded to the transportation company once the factoring firm receives payment from the buyer.
Types of Truck Factoring
There are two main types of truck factoring: recourse factoring and non-recourse factoring. The main distinguisher between these two is who is on the line in case the customer refuses to pay the invoice.
Recourse Factoring:
With recourse factoring, as the name infers, once the factoring company has failed to collect payment for any reason from the customer, they can actually invoice the trucking company that portion of the invoice that was not paid.
Non-Recourse Factoring:
Non-recourse factoring entails the credit risk of the factor being the risk of the customer not making the required payment. If the customer has not paid the invoice for any reasons specified in the contractual relation (like bankruptcy, insolvency, etc.), then the factoring company cannot bring an invoice against the trucking company regarding the unpaid amount.
Advantages of Truck Factoring
Truck factoring offers several advantages for trucking companies, especially those facing cash flow challenges:
Improved Cash Flow:
Supply chain finance provides a way for the shippers to mitigate or eliminate this problem by providing them with cash in advance when their invoices have been factored in, enabling the trucking companies to provide for various expenses such as bills, fuel, and other operational expenses.
Reduced Administrative Burden:
Outsourcing factoring is very convenient because it takes all the headaches of billing and debt collection and leaves the trucking companies with enough time to focus on their business.
Fuel Discounts and Other Perks:
There are discounts by factoring companies wherein the clients are allowed to buy fuel at lower prices, thus making up for the added cost of factoring and offering other forms of value added for the clients.
No Long-Term Debt:
Truck factoring is notably different from other styles of financing, which involve becoming burdensome with long-term liabilities. This makes it much more flexible and cheaper for organizations to undertake than normal structural equation modeling.
Scalability:
In the development process of a trucking company, the need for factoring will also evolve to higher or lower levels. Another advantage of factoring for trucks is that the factoring service can be adjusted to meet more or less business requirements, making it a very versatile service offering.
No Need for Perfect Credit:
The requirement placed on credit scores is usually relaxed in truck factoring compared with conventional financing companies. Thus, it is appropriate for those truck companies that do not meet strict credit standards.
Quick Approval Process:
The approval time for the financing method of truck factoring is relatively shorter than that of other traditional financing methods. In many situations, it can take just a few days for a company to be approved and then start factoring.
Access to Working Capital:
Thanks to truck factoring, those turnover-strapped companies receive some working capital that can help to struggle with some cash flow problems and invest in further development.
Disadvantages of Truck Factoring
While truck factoring offers many benefits, it’s essential to be aware of the potential drawbacks:
Cost:
Factoring fees and advance rates apply and are higher than interest rates charged by banks on loans and lines of credit.
Potential Loss of Control:
If you sell invoices to a factoring company, you lose some of the power of invoice invoicing and follow-up for payments.
Contractual Obligations:
With contracts in place, factoring is not as straightforward as one would think due to different features like terms of factoring, payment dates, and the like. One of the significant steps that businesses should follow is careful reading and comprehension of the agreement.
Stigma:
Truck factoring is therefore considered by some businesses as a last stop or as a flag to a poor financial standing. This stigma can disservice future attempts to obtain more conventional forms of financing.
Alternatives to Truck Factoring
If you decide that truck factoring isn’t the right fit for your business, there are other financing options to consider:
Bank Loans:
By so doing, traditional bank loans can offer a large chunk of capital in the form of an initial outlay, which may be accompanied by hard credit checks and lengthy application procedures.
Lines of Credit:
A line of credit means that funds are committed up to a certain limit, and a company may borrow as much as it requires within this limit, but only for the amount borrowed interest is charged.
Invoice Financing:
Invoice financing is similar to factoring, but instead of selling the whole invoice, the business sells it at a discount in order to get a partial amount of the invoice.
Quick Pay Programs:
Certain suppliers and shippers have faster pay, whereby trucking companies can be paid at an earlier date than other traditional ways.
Business Credit Cards:
While business credit cards may be useful because they offer short-term financing for trucking companies, the issued cards tend to attract very high interest rates and charges.
Choosing a Truck Factoring Company
Choosing which truck factoring company is important if you decide to go for it. Let’s go through what you should consider when making your choice:
Reputation and Experience:
A good factoring company should have good standing and tremendous experience in the trucking business.
Factoring Fees and Advance Rates:
Compare factoring cost and advance factor rates of different factoring companies to find which best suits your company’s needs.
Contract Terms:
Ensure that you go through the factoring contract and understand what has been written before signing the document. It is important that you know how much you are going to be charged, especially for fees, recourse terms and non-recourse terms, and almost everything else.
Customer Service:
To ensure that you get the best factoring services, go for a factoring company with a good customer relations department. To that end, this may assist in achieving a favorable factoring process and speed up the settlement of any difficulties encountered.
Technology and Online Tools:
Most of the contemporary factoring companies use online tools and facilities to support the factoring activity. Seek a company with good technology and information that can be easily accessed by various users.
Industry Specialization:
There are factoring companies that are particular to different industries, and one of them is the trucking industry. Selecting a company with experience in your industry can also bring extra value, including an understanding of the specifics of your business.
Conclusion
Truck factoring can turn into a valuable asset for companies operating in the trucking industry and experiencing problems with cash flows. It helps the management of the trucking companies to establish truck factoring and measure its efficiency, both strengths and weaknesses, available choices, and make a sound decision to either embrace it or reject it. With the proper factoring company and financing plan, the wheels of money within the trucking industry will continue to turn, and the business will progress.
