What Is A Factoring Company?
Updated: Nov 24, 2020
A factoring company specializes in funding solutions for businesses with slow paying customers in a variety of industries. The factor purchases unpaid invoices from businesses that have cash flow problems and pays the client the invoice amount immediately, minus a small factoring fee. The factoring company will then wait the full pay term of the customer to be paid for that invoice.
The process of a factoring company purchasing outstanding invoices and paying their clients quickly is the same within all industries. Typically in the trucking industry, it takes a customer anywhere from 30, 60, or sometimes 90 days to pay. The main reason trucking companies work with a factoring company is to get paid quickly for their invoices and not wait the entire pay term. Factoring is also known as accounts receivable factoring or accounts receivable financing.
Advantages of working with a factoring company
An invoice factoring company will usually pay its clients within 24 hours of them sending in their invoices, funding directly to their bank account. The fast payments improve the working capital of trucking companies. A trucking company's cash flow will improve immediately due to the cash advances from a factoring company and they'll no longer have money tied up in slow-paying accounts receivables.
As well as eliminating the wait time to get paid, trucking factoring companies offer additional factoring services and advantages. There is no new debt or bank loans with freight factoring, so it doesn't affect a company's credit score. A factoring company will sometimes offer its client dispatching help and fuel cards. Some will also offer help with making sure their new trucking company clients are compliant and have active insurance policies.
The best factoring companies will offer flexible contract options to work with. The flexible terms are beneficial for large and small businesses, depending on their company needs. The terms range from month-to-month contracts to long term contracts. The contracts are either non-recourse or recourse factoring agreements and offer back office assistance like billing and invoicing.
How much do factoring companies charge?
This depends on a lot of criteria. Factoring companies make their money from charging clients a small percent per invoice they send in. Some companies charge a flat rate fee for all invoices and some offer tiered rates depending on how quickly a customer pays. Some factoring companies will also set monthly minimums on how much their clients need to factor, which could also affect the rate charged. There also may be additional charges that cover the choice of ACH or wires.
The biggest factors that influence factoring fees are how long the trucking company has been in business, the size of their trucking fleet, the volume of freight hauled each month, the total monthly revenue, and the length of the factoring contract. Also, the creditworthiness of the customers could affect the factoring fee. If a customer has good credit, there is limited risk when working with them. Both parties would get paid and therefore it won't affect the factoring fee.
How to choose a factoring company to work with
When choosing a factoring company to work with, it's important to do research. Understanding what to look for when choosing a factoring company to work with is key. Knowing what you want out of your factoring contract will make it easier to avoid the worst factoring companies. On the outside some factoring companies may seem great, but once you're locked into a contract with them you notice all the hidden terms and fees they didn't tell you about.
Top things to look for when choosing a factoring company:
Same day pay to keep your cash flow consistent.
Additional factoring services like dispatching, compliance, and insurance assistance.
Free fuel cards with advances and discounts.
Client representative that are easily accessible via phone and email.
Flexible contract options to suit personal preferences.
Free credit checks on customers to avoid working with bad debtors.
No hidden terms or fees.
When choosing a factoring company avoid ones with unexpected chargebacks. Trucking companies should never be charged back without being told first. Also avoid a factor if they have high monthly minimums as these can cause issues for trucking companies who don't met them for whatever reason. If a factoring company has a 1-800 number, it probably means they are hard to get on the phone. Companies that only offer long term contracts and have high termination fees should also be flagged when deciding who to work with.
Why trucking companies should work with factoring companies
Without having consistent cash flow or financial bank loans, trucking companies need access to their working capital, especially if they work with slow paying customers. Getting paid in 24 hours allows trucking companies to stay on top and manage all the industry expenses. Working with a factoring company doesn't add any debt to trucking companies since factoring is not a loan and nothing needs to be paid back. Factoring doesn't hurt a truck drivers credit either.
The additional factoring services that companies offer provide truckers with connections in the trucking industry to stay loaded up with the best paying loads. Most factoring companies will offer clients free fuel cards for their fleets. The fuel cards offer discounts at multiple locations to save drivers money on every haul. Truckers would not need to worry about running out of money for fuel while on the road.
Are you looking for a factoring company?
Porter is a leading freight factoring company with the best rates in the industry, no hidden terms or fees, and access to the best paying loads. To speak with a factoring specialist and get a free quote, fill in this online form or call us today at (205) 397-0934.