If you’re running a trucking business, chances are you always need immediate and consistent working capital. And that’s where load, invoice or freight factoring comes in. Freight bill factoring is increasingly becoming a popular way for some owner-operators and trucking companies to acquire advance business capital for continued operation.
While there are nearly 12 million trucks, rail cars, locomotives, and vessels to move goods over the transportation network, many business owners and truck operators still don’t understand the concept of factoring financing services and how it works. After all, load factoring companies can help small businesses bridge invoice payment gaps with upfront payments up to 90% of the original invoice.
What is Freight Capital Factoring?
Simply put, freight factoring is a financial transaction where a trucking company sells its invoices to a factoring company that converts it into immediate cash. It’s a service that help trucking companies manage receivable collection and billing instead of waiting for days and even months to get money.
Ideally, hauling freight would involve delivering cargo to the customer, receiving payments minus cost involved to reaslize profits. However, this is not an ideal situation considering the fact that payments are not made upon freight delivery, with industrial-standard average time for processing freight bills being 40 days, and some load factoring companies taking up to 90 to fully honor payouts.
These payment-processing times are of great essence to a freight company’s budget, and may need to explore alternative financing options to ensure continued business operation. Before, many trucking companies bridge gaps in working capital by acquiring bank loans. Applying for a bank loan is not only time-consuming but also costly in terms of interest payments, thus not ideal for trucking companies.
How Load Factoring Companies Work?
In the trucking industry, quick payments are equal to more work opportunities and overall success of the business. Factoring company converts your invoices within the shortest period possible, giving you access to the capital you need to keep your business afloat. Since this is a business transaction between trucking and factoring company, certain incentives has to be present.
For the freight company, the incentive is immediate payment. The load factoring company get to earn profits from the percentage they charge on the invoices once the customer makes payment. Customers too have certain incentive in this transaction, and that is to work with a big freight company that has the financial muscle to operate, awaiting payout, instead of dealing with a small freight company that don’t have working capital to meet operation costs.
For small and privately owned freight companies, this type of advance business capital helps manage budget properly, allowing them to meet operational expenses and avoid debts. Some freight companies, however, will be uncertain of the transaction costs. Here’s how the invoice factoring process operates.
- A customer (company) orders products that needs to be shipped from location A to location B
- They hire your fright company services to deliver it
- You conduct background credit checks on the customer to see if they qualify for your services
- If so, you make the delivery and furnish your factoring company with the invoice and all the load’s paperwork for payout processing.
- Your factoring company buys that invoice, and they process payment for you within the shortest time possible, possibly within 24 hours.
- After you’ve receive the cash, the factoring company is then tasked to collect the payment from the customer in order to realize its profits
These are just the basic steps involved in freight factoring but the process may entail additional considerations depending on your specific situation. Because you’ll need to apply for factoring services just like applying for car insurance, its important to approach this step with utmost caution as it will eventually determine the factoring agreement you or your company will get. Before entering into any contract, keep in mind the details of the agreement and ask questions if you’re unsure of anything.
In conclusion, load factoring companies operate differently. Sure, they facilitate cash flow, but some companies are more focused on helping your freight company manage communication and payment collections. Therefore, take you time to find the right factoring company for your business.