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Guide to freight factoring

Guide to freight factoring

Freight factoring, also known as trucking or transportation factoring, allows a financial institution or a factoring company to receive invoices from a trucking company at a discount, turning them into immediate cash. It is a way for businesses to get faster payments for their services. Trucking companies don’t have to wait for months to get payments, and they can continue to offer their services. Here’s what one needs to know about freight factoring:

What it is
Trucking companies would go bankrupt and have to cease their operations if all their customers did not pay them on time and provided them with outstanding invoices. However, trucking companies rely on freight factoring to keep their operations running seamlessly throughout the year. Besides trucking companies, many other businesses offset their credit risks by using freight factoring.

Certain specialized organizations, known as freight factoring companies, offer to pay cash to trucking companies and other supply chain businesses in exchange for unpaid invoices received from their respective clients. With the liquid cash received, trucking companies can resume their business operations unabated. Later, when the invoices are due for payment (after 30, 60, or 90 days), the clients of the trucking companies pay the invoice amounts to the factoring company. Specific kinds of factoring companies may demand that these businesses pay an interest amount along with the invoice amount.

How freight factoring works
The process can be broken into simple steps. They are mentioned below:

  • The first step involves a trucking company delivering its load or shipment to its clients. The client signs a Bill of Lading (BOL). This document is on-record evidence that the load was delivered successfully.
  • Usually, the trucking company would be expected to send the freight invoice to the client and wait for payment later. However, trucking companies cannot afford to receive money later for their services, so they send the bill to a factoring company.
  • The trucking company offers the BOL, rate confirmation, and the unpaid invoice to the factoring company. After receiving these documents, the factoring company reviews them and other information to verify the creditworthiness of the trucker’s client. Once that is established, the factoring company confirms that the invoice can be purchased, and cash can be given to the trucking company in return.
  • While paying cash to the trucking company, certain factoring organizations may offer a significant advance percentage (which could be up to 90%) of the invoice amount and pay the remainder of the “reserve” amount after they recover the invoice payment from their client. Alternatively, other factoring companies may pay the full cash amount of the invoice and later recover the money from the trucking company’s client.

Types of freight factoring
Here are the two main kinds of freight factoring services offered by factoring companies. One must note that all the companies do not offer all the services listed below:

  • Recourse factoring
    In recourse factoring, the final risk of repayment of the advance invoice amounts falls on the trucking company. It is, however, also beneficial for trucking companies in one big way: in this kind of factoring, the advance payment amounts are larger, meaning that trucking companies get larger amounts of liquid cash to continue their operations, and the factoring company fees are lower. Additionally, the factoring company runs a comprehensive creditworthiness test on the trucking company’s clients. This somewhat reduces the risk of non-payment from the client for the trucking company.
  • Non-recourse factoring
    In non-recourse factoring, the factoring company bears the brunt of the entire invoice amount if the trucking company’s client fails to pay it entirely on time. As this increases the credit risk of the factoring companies, they charge higher factoring fees from the trucking companies to offset that risk. Additionally, non-recourse factoring companies only accept invoices from companies and clients with a near-perfect credit score and history. This makes them inaccessible to smaller trucking companies and smaller freight businesses.

Both types of factoring companies come with their pros and cons. So, trucking companies or clients should choose one depending on their priorities and resource constraints.

Benefits of freight factoring
As implied earlier, freight factoring is a blessing for many companies in the international and domestic trade sectors. Here are some of the biggest advantages to choosing a freight factoring company:

  • Continuity in business
    Business operations in the logistics and supply chain industries never stop. Trucking companies need to keep delivering loads to sustain themselves, grow, and diversify their operations in the future. Essentially, revenues from international and domestic trade depend on business continuity. Freight factoring ensures that, by momentarily absorbing trucking companies’ credit risks, factoring companies encourage their clients to continue their operations without pauses.
  • Immediate liquidity availability for businesses
    Ready-made liquidity for trucking companies is key to their business continuity. Factoring companies offer trucking companies a much-needed lease of life by offering them immediate cash for their unpaid invoices.
  • Enable businesses to focus on their core operations
    Chasing clients to receive outstanding payments is time-consuming and hinders their core operations. Factoring companies ensure that this does not happen to their clients.

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