The shipping industry is vital to businesses of all kinds as well as consumers. There is plenty of freight of all shapes and sizes that need to be moved around the country. Owing a trucking company can be lucrative but like any other business, it must be managed well. In addition to quality vehicles, personnel, buildings, and other equipment, invoicing effectively for prompt payment is an essential factor. There are several ways to manage invoices. One that is growing in popularity and proving effective is freight factoring.
What Is Freight Factoring?
Freight factoring is also known as trucking factoring or transportation factoring. Whichever name is used, it is the same. A shipping company will sell its invoices to a third-party company or bank, called a factor. The invoices are sold at a slight discount. The shipper collects the sale price and the factor waits for payment from the customer.
What Are the Advantages of Freight Factoring?
At first glance, freight factoring may seem like an unnecessary expense. After all, wouldn’t a trucking company prefer to collect the entire sum of an invoice? The reduction in price offered to the factor is small and well worth its intention. Payment on invoice typically takes anywhere from 30-90 days or more. For a small shipping business, this waiting period can wreak havoc with finances. They may need to use lines of credit or take out bank loans to meet monthly expenses. This increases a company’s debt and eats into profits. Being paid immediately upon delivery of goods ensures solid cash flow.
What Are the Differences Between a Freight Factoring Company and a Factoring Service Bank?
Both freight factoring companies and banks that offer the service operate in the same way. Unpaid invoices are essential collateral. The factor pays the shipping company and recoups the money plus a small profit by buying the invoices. Banks offer several advantages over factoring companies. They have greater experience as well as access to greater financial resources. A bank’s rates are generally lower, they have greater stability, and they can also offer a line of credit that can grow with your company.
What Are the Steps to Using Freight Factoring?
They are several steps that a shipping company must take in order to begin using freight factoring.
- Submit an application: The factor will review the application and if it’s approved draw up a contract that will contain all the necessary details.
- Assessment of customers: The factor will do an assessment of the shipping company’s customers and notify them that they will be paying the factor for their invoices.
- Send invoices to the factor: The factor gets the invoices, pays the shipping company, and then waits to collect from the customers.
- The factor handles all collections: The factor will manage payment of the invoices, including assessing late fees and tracking past due amounts.
- Finalizing the process: Once the factor collects from the customer, it deducts its fees and contacts the shipping company if there is an outstanding balance owed to the factor from the shipper.
All of the legwork is performed by the factor, leaving the trucking company free to focus on the business of shipping.
What Does a Factor Charge For Their Service?
The amount factors charge depends upon a number of things such as the credit risk of the customers and how many invoices they collect each month. The average rate is about 3.5% but varies. The exact details are spelled out n the contract.
Running a shipping company is a big undertaking. Especially for smaller companies, having to wait to be paid for invoices can be harmful financially. Using a freight factor is a good way to get paid for invoices immediately and keep finances healthy.
