A lot of new and growing businesses often find themselves in situations where they need immediate cash quicker than accounts payable can keep up. Not having a steady cash flow can really impact the ability of a business to rope in new clients. This is why many of them resort to factoring.
Factoring is an alternate form of financing where a business sells its unpaid invoices to a factoring company. The factoring company gives the business an ‘advance’ by buying the invoices at a lower fee than it collects the payment from the customer directly.
Freight companies use factoring services to take on large contracts and pay truck driver salaries or any other emerging expenses such as fleet maintenance or paying for office rent. The advantage to factoring is that it gives a trucking business the working capital they need almost immediately rather than them having to wait for 30, 60, or 90 days to receive client payment.
There are many freight factoring companies in operation and as much as the business models may be similar, there are various things that set them apart.
In light of the risks and challenges associated with different industries, freight companies need to work with a factoring company that is well-practised in the transport industry like ezfreightfactoring.com. This can help you avoid shortcomings that a less experienced factoring company may provide.
Here is a list of ten things you need to consider when choosing a freight factoring company to partner with.
1. Does Your Ideal Factoring Company Specialize in Logistics?
A lot of factoring companies claim to have logistics-specific but in truth, this is not always the case. A factoring company with experience in your industry should have an idea of the major players in transport, the terminologies used, and the invoicing requirements needed to make sure clients pay fully and on time.
Working with a factor with limited experience in the transportation industry can prove to be a serious liability since they won’t know the ins and outs of the business. This means they won’t be able to offer additional services or flexible solutions suited to your trucking company.
A good rule of thumb is to look at factoring companies endorsed by a local or countrywide trucking association.
2. What Is the Fee Structure
One element you should give heavy thought is the fee structure since invoice factoring is a form of financing.
Keep in mind that not all factoring providers offer the same terms. Factoring fees on the face value of the invoice usually range from around 1 to 5% on a monthly basis while advances can range between 75-90%. The advance rates can, however, be even higher for non-specialized factoring companies.
Be very careful with factoring companies that claim to be the cheapest, easiest, and fastest to use as they may not be the best for business. Such companies tend to have additional or hidden costs such as attorney fees, field examination fees, background check fee, or application fees.
3. Does the Factor Provide Recourse or Non-Recourse Factoring, or Both?
Before settling on a factor, you need to consider whether they provide recourse or non-recourse factoring. With recourse factoring, a business must buy back an invoice sold to the factor in case the invoice is not paid by the client of the business.
With, non-recourse factoring, albeit being a more costly option, the factoring company assumes the full risk for non-payment of an invoice. This is a good choice for freight companies since they can avoid bad debts by yielding all obligations tied to collecting the invoice.
However, given the risk associated with non-recourse factoring, very few factors provide non-recourse factoring services. Those that do will be very thorough so make sure you provide invoices from your most creditworthy clients.
4. What Package Suits Your Company Best
If you do decide to go with the non-recourse factoring option, you need to understand what package is best for your company between tiered rates and flat rates.
A tiered factoring rate will charge a very small percentage of the total invoice amount. In some instances, the fee might stand at 1% or even lower. The catch, however, is that this value if the broker takes a long time to pay the factoring company.
Flat factoring rates, on the other hand, are more direct. The factoring company simply charges a set percentage of the total invoice amount.
5. Consider Customer Service
It’s very important that you choose a factoring company that’s going to be easily accessible when you need them. If the factor provides a dedicated account representative who is going serve as your go-to person in case you have any issues, concerns, or questions about your account.
Some factoring companies provide 24-hour online account access so their clients can log in to see where their money is in the factoring process and they can receive notifications on discounts, client credit analysis, and invoice collection.
If a factoring company lacks dedicated customer service or online account provision, then keep in mind that they may not be fully equipped to support your business.
6. The Reputation of the Factoring Company
Since the factoring company you will choose to partner with will be dealing with your clientele and your money, it’s absolutely critical to the growth of your business that the factor has a good reputation.
Before signing a contract, make sure you look into the company’s previous relations. Do they have a satisfied client base? How do they relate to their clients’ brokers? Such information can prove useful to whether or not they treat clients fairly, especially when collecting.
7. How Flexible Is the Factoring Provider
You want to partner with a factoring company that provides you with some flexibility within your working contract. Some companies need a minimum number of invoices every month, some don’t work with short-term contracts, while some have prepayment penalties.
If possible, try and avoid working with factors that require long-term contracts even if they have minimum charges as they might cost you over the long-term. A good factoring services provider will not require a minimum fee but should have the option available if required.
Additionally, you want to partner with a factoring company that lets you choose what invoices to factor so try and avoid companies that factor all invoices or factor invoices from a specific client of yours.
8. What Additional Services Do They Provide?
A lot of operating factors have various incentives to woo freight companies to partner with them. As such, you need to find out whether the company you work with will be getting you your money’s worth.
Some factors offer to take over the accounts payable functions of your business. This means they will be in charge of sending invoices and collecting them.
This outsourcing solution can be very convenient for freight companies since they’ll be almost always assured they’ll receive payment for their work plus they won’t have to spend resources on hiring extra staff to do that work. But as appealing as it may sound, a lot of small businesses tend to retain control of their customer relationships by sending their own invoices.
Other factoring companies have a fuel card or fuel advance programs which usually have discounts that freight companies can sign up for and save good money.
9. How Fast Will the Factor Process Your Request
A lot of entrepreneurs and business owners have found themselves in situations where they needed immediate cash. That’s the nature of doing business. It can sometimes be so cruel that you don’t have the luxury of waiting for an invoice due in a week, let alone 60 days.
As such, freight factoring is an ideal solution for freight companies in urgent need of working capital. Therefore, freight companies ought to consider the float period as stipulated by the factoring company.
The float period is the time that you have to wait for the advance paid by the factor to reflect on your account. Usually, the float period lasts between 2-3 days.
10. What About the Credit Reports
A huge benefit from working with a freight factoring company but largely goes unnoticed is that they can provide credit information on all your clients. This information can be quite useful for your future business endeavours as you’ll have an idea of which client you can give credit to and which one will be a risk.
The Final Word
Choosing a freight factoring company can be overwhelming but it’s something freight companies need to do systematically.
Make sure you fully understand the terms regarding fees. Even if a low upfront rate seems very alluring, there can be a host of additional fees that will escalate the final fees.
Ask the representative a lot of questions regarding the terms and rates so you can get a clear understanding.
For the sake of your business, you need to work with a company that is fully transparent on what will happen, how much they intend to charge, and if they have enough resources to help your business grow.