One of the most significant issues for any small business is cash flow. Most clients you haul for pay your invoices 30, 60, or even 90 days later. In the meantime, you still have expenses to continue to run your company. Some daily and monthly expenses like fuel, maintenance, and insurance can’t be put off that long. This is why many businesses, including trucking, use a factoring company.
What exactly is factoring? And what’s the best way to choose a factoring company for your trucking business? Here are some tips and tricks you should know.
What is factoring?
A factoring company essentially buys your unpaid invoices. Factoring is sometimes also called accounts receivable financing. Factoring companies pay you the invoice amount quickly, usually within 24 hours once it’s been verified. They then collect that same invoice balance from your customer whenever they pay out.
You can tailor factoring based on your needs. Some business owners factor all of their invoices regardless of how fast brokers pay. Others only factor some, usually for slow-paying customers or on an as-needed basis.
Factoring puts cash in your pocket so you can use it for payroll, fuel, and other short-term expenses. It also relieves some of the administrative burdens of chasing down payments. For this reason alone, many smaller businesses factor all of their invoices.
Recourse vs. non-recourse factoring
What happens if your customer pays the factoring company very late, or not at all? The answer depends on the type of factoring you choose.
Factoring companies offer two types of factoring: recourse and non-recourse. In recourse factoring, if a customer doesn’t pay an invoice, you have to “buy it back” from the factoring company and seek payment on your own. In other words, you are ultimately responsible for any non-payment.
With non-recourse factoring, the company assumes responsibility for the debt and collecting it. But be careful; examine the fine print because there are some restrictions.
- Some only offer non-recourse protection if your customer goes bankrupt or becomes insolvent.
- Invoices from high-risk companies with low or no credit scores cannot be factored.
- There are higher fees associated with non-recourse factoring, so account for that in your costs.
Non-recourse factoring can be beneficial if you understand the restrictions. Some have their own credit teams and can protect you from working with bad-credit clients. Either way, a good factoring company should make diligent efforts to collect all invoices you choose to factor.
What does a factoring company do?
Factoring companies buy your invoices and pay you right away, minus a fee — usually a percentage of the invoice. Then they collect the outstanding invoice amount when your client pays. It can be easier than getting a line of credit or loan from a bank in some ways. Factoring with a broker can be beneficial for small businesses because:
- Your credit score matters less than the credit score of your clients and customers.
- You get paid right away.
- How much you “finance” grows as you factor more invoices from your customers.
- The more invoices you factor, the lower your rate.
- Some factoring companies offer other back-office accounting services like accounts payable and human resource management for a small fee.
A factoring company can become part of your business accounting team, managing accounts receivable for you. Since they make money from collecting on your invoices, they take on much of that work for you.
A good factoring company will offer options. They won’t have any minimum number or dollar amount of invoices you must factor; you can choose which ones to factor, they charge flat rates, and there are no cancellation charges or long-term contracts.
Which industries use factoring companies?
Almost any industry that invoices customers can benefit from factoring. Here are a few examples:
- Construction companies and construction suppliers
- Government agencies and contractors
- Healthcare providers and medical equipment suppliers
- Oil and gas
- Service providers (salons, pet grooming, repair shops)
- Technology and software
- All aspects of the transportation and logistics industry
Almost any industry with ongoing short-term expenses impacted by cashflow or that needs accounts receivable support can benefit from invoice factoring.
How much do factoring companies charge?
Factoring companies make money by charging a fee, usually a flat percentage of each invoice you factor. Generally, fees range from 1.15% to 3.5% per month. This can vary based on the type of factoring you choose and the number of invoices (and dollar amounts) of each invoice you factor.
It’s important to pay attention to the fee structure when you talk to a factoring company. Some include additional fees for some services, including:
- Money transfers
- Operations costs
- Collections costs
The primary thing to keep in mind is that the factoring company you work with should be transparent and upfront about any of these fees. If you see sudden hidden fees taken out of your invoices, that’s a red flag to investigate. Those fees come directly out of your profits, so you want them to be as predictable and reasonable as possible.
How does factoring help trucking companies?
The largest benefit is rapid access to cash, enabling you to pay short-term operating costs and spend less time on collections and administrative work.
Many businesses fail due to a lack of working capital or cash flow, especially when they first start. While factoring an invoice does cost you a percentage in fees, it’s often worth the expense. You can take on a new client without worrying about paying the operational expenses that come with it.
If you’re just starting, the time you save by letting someone else chase down your invoices and the paperwork that goes with it can be invaluable. The more you grow, the more billing work you will have. The ability to outsource that to someone else is a huge benefit.
No matter how large or small your trucking business is, invoice factoring can contribute to your success in many ways.
How do you choose the best factoring company?
There are many factoring companies out there, and choosing can be a challenge. The key is to choose the best fit for your unique circumstances. Just as you would interview a new employee, ask these questions of your factoring company:
- How quickly will I get paid when I submit an invoice? The answer should be within 24 hours.
- Which invoices can I factor and which invoices are ineligible? This may depend on your customers and their credit scores, so have a list ready.
- Can I factor some invoices and not others? Usually, you can, but make sure. Some companies require you to factor every invoice.
- What are your factoring fees? Preferably, it’s a flat fee. Good factoring companies often offer a discount or low rates if you factor more invoices.
- Are there any other fees I should be aware of? (Money transfers, collateral, etc.) Make sure you are clear on these fees, and they work with your budget before you sign any agreement.
- Is there a long-term contract? If so, how long is it, and what are the terms?
- Do you offer non-recourse factoring? What are the terms, and how much more does it cost?
- What happens if a customer does not pay an invoice within a reasonable time? What is the time limit for customers to pay invoices?
Get paid when you need the money.
Truckstop.com offers factoring services that are simple and easy to use. You can even get paid the same day. We offer flat fees, non-recourse factoring, full-service billing, flexible cancellation, and no minimum volume requirements.
In short, you get paid on invoices when you need the money the most. Want to learn more about our factoring services and how they can work for your company? Request a demo today. We’re here to answer your questions and help make sure your business is a success.