Business Management

A Quick Guide to Choose the Best Factoring Company for Trucking Business

A Quick Guide to Choose the Best Factoring Company for Trucking Business

A consistent and continuous flow of working capital is an everyday challenge for small businesses, like trucking. Using a factoring company is a common financial solution that can convert your proper invoices into working capital to run your company.

The blog will cover the role of factoring companies in trucking businesses, how factoring works, types of factoring, and tips to choose the best factoring company for trucking businesses.

What Trucking Companies Face Every day?

Trucking companies or similar small firms have long payment periods and seasonal billings. Most of their clients pay for the invoices raised after 60 to 90 days. So, it becomes hard to cover the cost of daily activities, such as fuel, food, service and maintenance, and insurance.

So, how do such companies manage their expenses and expand their businesses at the same time?

The answer is an invoice factoring company.

Factoring companies bridge the gap between the working capital need and actual cash flow without heavy investments.

However, not all factoring companies can help your business. There are different factoring companies – some serve various industries, while others cater to particular businesses. There are different types of factoring services too.

When considering raising funds by selling invoices, it is critical to partner with the right factoring company, as you would closely work with them for the long-term.

What Does Invoice Factoring Companies Do?

A factoring company essentially buys your firm’s invoices, pays the money immediately, and later collects the due invoice amount from your customers whenever they make the payment.

In return, they charge a small fee – a certain percentage from the invoice.

Invoice factoring is a financial transaction concept where businesses sell their account receivables or invoices to factoring companies to use the money as working capital.

The process is also known as accounts receivable financing or AR factoring.

Using a factoring broker’s services is simpler and more accessible than loaning money from the bank or getting a line of credit.

How Does the Process Work?

When you deliver goods and services to your clients, you generate and issue invoices. The invoices are generally cleared within 30, 60, or 90 days based on the agreement signed between you and your client. But you may require funds to fulfill immediate needs.

AR factoring allows you to sell some of your invoices to a factoring company. Upon verifying the invoices, the factoring company will pay you the amount within 24 hours and collect the invoice balance from your clients when it is due.

You can use either factor all your invoices or some based on your business requirements.

Three parties are involved in the factoring process:

  • You, the company that issues the invoice
  • Your customer, the account debtor who owes you the payment
  • The factoring company, who buys the invoice

What are the Benefits of Choosing a Factoring Company?

Factoring provides you a steady cash flow to meet your short-term expenses, such as rent, fuel, repairs, maintenance, etc. It also relieves you from the pressure of chasing down clients for payments and gives you enough working capital to support business development.

It allows you to relax and strategize your growth plans than worrying about everyday expenses.

Other benefits of hiring a factoring company include:

  • You receive credit faster than bank loans in less than 24 hours.
  • Your credit score doesn’t count. Factoring is based on your customer’s creditworthiness.
  • Unlike financial institutions, you can customize your term loans and negotiate fees with factoring brokers.
  • The service fee is much less and reasonable.
  • Your finance will grow as you sell more invoices. Also, the more invoices you sell, the lower the interest rate gets.
  • Factoring invoices is not a loan. Therefore, you won’t add any debts to your company’s balance sheet.
  • No long-term contracts, no cancellation fee, or minimum or maximum value. You choose what you want to sell and when.
  • Some factoring companies also offer additional services at less cost, such as HR management, accounts payable management, and of course, account receivables management.
  • You can make the brokers part of your business accounts team.

How Factoring Benefits Trucking Businesses?

Regardless of your trucking business’s size, partnering with a factoring company will drive business growth and success.

Unfortunately, many trucking companies close down due to a lack of steady cash flow. They run on short-term operating costs, timely collections from customers, and administrative works. And lack of cash flow slows them down from taking new customers. Factoring gives you a way out by providing quick access to your cash without loaning.

Despite the small percentage fee, factoring invoices is worth the investment. You will eventually start worrying less about the everyday expenses that come with acquiring new customers.

Besides, chasing customers down is an annoying and time consuming task. With a factoring company supporting you, you can save time and effort preparing invoices and following up with your customers. And it will be a massive benefit as your business grows.

Types of Invoice Factoring

The type of factoring you choose depends upon your customers. Do they usually pay on time, very late, late, or after a lot of probing? Based on the answer, you can settle down with one of the below models:

Recourse Invoice Factoring

The risk of the payment falls on your shoulder in the Recourse Factoring model. In the event of your customers failing to pay the invoice amount to the factor, you will be liable to ‘Buy Back’ from the factoring company and settle the payment.

Non-Recourse Factoring

Here, the factoring company takes the responsibility of collecting the invoice outstanding from your customers. In case of non-payment, you will not be liable to pay back to the factoring company.

The service fee is higher in Non-Recourse Factoring than Recourse factoring. However, before signing the contract, validate the terms and conditions of non-recourse factoring. The factoring company may apply certain conditions. They may include:

– Protection against insolvency or bankruptcy, lest the customers face any one of them.
– Factoring restriction on customers that have low or no credit score.

If the terms and conditions are understood, Non-recourse factoring can prove lucrative for trucking businesses. You can choose a company with its own credit team to help you identify low-scoring clients and prevent you from working with them.

Tips to Choose the Best Factoring Company for Trucking Business

As we mentioned earlier, with so many factoring companies out there, choosing could be a difficult process. Therefore, the one you go for should suit your business goals and working capital requirement. The following factors will streamline your selection process considerably:

Payment and Fee Structure:

  • It would help if you go through the fine print of the factoring company’s proposal.
  • Find out about the factoring fee – if its a flat fee or percentage-wise.
  • Ask the firm when they would pay you after submitting an invoice.
  • Check for processing fees, application fees, and other fees that you should be aware of, such as money transfers, bank charges, collateral, etc.

Most reputed and reliable factoring companies offer a flat fee. Besides, they also give a discount or reduce the percentage if you sell more invoices.

However, remember that the lowest factoring interest rate doesn’t necessarily imply it to be the best option. Surcharges can be 3X in certain companies. Compare the fee structure with other proposals to get an idea.

Invoice Eligibility

  • Get your customers’ company and credit score list ready, and find out which invoices are eligible (and which are not) for factoring.
  • Find out if you have to factor in all your invoices or if the choice is yours.

Industry Expertise:

  • Find a factoring company that has sufficient experience in the trucking industry.
  • No two industries are the same. Some may require flexible terms and more service.
  • Go through the financials of the company and its previous track record to determine its credit value.

You don’t want to trade with a company that goes out of business suddenly and leaves you high and dry. Choosing a broker with a success record in your industry and a solid financial background will give you the required assurance to partner with them.

Terms and Conditions

  • Find out if the company offers a long-term contract. If yes, what is the period, and what are the policies.
  • Does the company offer non-recourse factoring? Find out the clauses and the cost, if they do.
  • Find out the ‘ifs and buts’ – within how many weeks or months customers have to clear invoices, or what happens if your customer doesn’t pay an invoice in time?

Credit protection is critical in recourse factoring. So, unless you have an expert financial advisor helping you, non-recourse factoring will be a wise choice.

Charges of Factoring Companies

A good factoring company will charge you a flat fee for each invoice you sell. The percentage of fees falls between 1.15% and 3.5% per month. However, the rate may vary depending on the factoring you choose, your customer credit reputation, and the number of invoices you factor in.

It is important to discuss money transfers, registration charges, operational costs, surcharges, collection costs, and collateral, and go through the contract, fee structure, and payment terms and understand them before closing the deal.

Regardless of the service type, the factoring company you choose must be transparent and upfront with its terms and conditions. If you are charged with hidden fees that weren’t included in the signing contract, you may want to investigate the matter further before it blows out of proportion.

Get What You Sign For and When You Want

Load Logix offers more than just financing – we have provided successful factoring services to companies across the USA and Canada. Our solutions are completely customized based on your trucking company requirements, and you can get paid within 24 hours if customer credit scores are perfect.

If you are interested to learn more about our services, contact our factoring expert today and request a free demo.