Factoring 101: Understanding the Basics of Factoring

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Running a trucking company is challenging as you have to deal with different aspects of business, including cash flow. According to simplexgroup.net, starting a new trucking business is often expensive. Customers who are late on their payments or have defaulted can create a major cash crunch for the business. This means you will require consistent cash flow to grow the trucking business.

A solution to this cash flow problem is using trucking factoring services. Factoring may seem straightforward, but it can often be confusing to those who are not familiar with the concept. Keep reading to learn what trucking factoring is and how your trucking company can benefit from it.

What Is Trucking Factoring?

Factoring companies take on the responsibility of invoice processing and invoice collection for a trucking business. By selling invoices for a small amount, also known as the reserve rate, trucking companies can receive a payment within 24 hours instead of waiting for the broker or shipper to pay the trucking company. This improves cash flow for the trucking business, allowing them to tackle regular operating expenses. With the inconvenience of collecting payments offloaded to the factoring service provider, trucking companies can focus on growing their business and maximizing profits.

How Does It Work?

Typically when you haul cargo from one place to another, you submit your paperwork to the shipper or broker to get paid, but there is always a chance that you do not receive the payment on time and may have to wait an extended period.

However, when you use factoring services, instead of submitting your paperwork to the broker, you submit it to the factoring company. Some factoring companies also offer to do billing and invoicing on your behalf.

Typically trucking companies get paid 80% or 90% of the invoice value by factoring services after selling their outstanding invoices. With truck factoring, you have the option to cancel services anytime if the agreement is not working for you instead of worrying about being bound by long-term contracts. You can also choose how many invoices to factor. This is also termed spot factoring.

Difference Between Recourse and Non-Recourse Factoring

There are two main terms you should know about when it comes to entering a factoring agreement: recourse and non-recourse factoring services. Factoring agreements often have a clause in the contract known as recourse which allows the factoring services provider to collect payments from the trucking business on an invoice in case the customer, such as a broker or shipper, fails to pay within the given timeframe or does not pay at all.

The amount the trucking business has to pay back to the factoring service provider generally includes lost fees and the original cash advance received on the invoice. However, some factoring companies allow their clients to repay by submitting a new invoice of sufficient value in exchange for the unpaid invoice rather than paying them back in cash.

On the other hand, it is a common misconception in the trucking industry that non-recourse factoring leaves the trucking company off the hook if a customer fails to pay under any circumstance. While many factoring businesses claim to be non-recourse, they can have a clause in their agreement that can hold you liable for late-paying or non-paying customers because factoring service providers do not offer payments on invoices for free.

Although non-recourse factoring generally means that you do not have to pay the factoring business on an unpaid invoice, it may only apply in rare circumstances. For example, suppose the customer of the trucking business declares bankruptcy or goes out of business between the time the invoice is submitted and they are due to pay up. In that case, the trucking business may not be liable for the unpaid amount.

Bankruptcy and closure are typically the two main reasons that qualify for non-recourse factoring if these conditions occur between the 90-day factoring period. However, in the event of disputed invoices, non-recourse factoring may work in the same way as recourse factoring.

Another main difference between recourse and non-recourse factoring is that recourse factoring services get a lower percentage of the total invoice value. Therefore, it is always best to carefully review the terms of the factoring agreement before signing the contract.

Requirements to Qualify for Trucking Factoring

Every truck factoring company has a unique set of eligibility requirements. For example, for some companies, you may need to meet a minimum credit score to qualify. Some factoring companies can also offer you services such as checking the credit history of potential customers.

The factoring service provider may also determine whether your record of financial transactions or audit trail is clear before approving you. Another factor that can come into play is whether the invoices are valid. Most factoring service providers prefer verifying each invoice before processing them to prevent fraudulent activity.

Other requirements for qualifications can include your accounts receivables not having any liens on them. You can also ask the factoring company for their list of qualifications to see if there are any areas where you can improve to meet the requirements and qualify for their services.

Why Your Trucking Business Needs Factoring Services

Although you can run your business without using truck factoring, you might have difficulty keeping a consistent cash flow. While waiting on payments, you may have to take on loans to cover payroll and fuel costs. Factoring invoices is not considered a loan and is often easier to access than other financing options.

You also do not have to waste time tracking payments. This will reduce your operational overhead costs. In addition, the invoices can be submitted to the factoring provider for partial or full truckloads because there can be no minimum volume requirements. Factoring saves you a lot of time and money, and you can even submit all your invoices online at any time of the day, allowing you to focus on other operational needs of your business.

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