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What Is Truck Factoring and How Can It Help My Company

commercial truck insurance - truck factoring

Truck companies help contribute to the economy’s growth by transporting goods throughout the country. Given that these businesses transport loads of goods, they are usually faced with challenges such as high fuel expenses, expensive truck repair, and exuberant fees in office rent. Therefore, to keep going, you need to have a reliable source of funding to keep your doors open. 

However, freight companies usually have to wait after delivery before clients can settle their payments. This cash flow delay for most companies causes economic strains to the business and may affect its performance in the long-run. 

To sustain your truck business despite the delayed payments from your clients, you need to have steady financial backing. Truck factoring helps your business achieve this by providing financial support to your business in case of delayed payments to ensure your business remains operational.

What Is Truck Factoring and How Does It Work?

After freight companies deliver goods to their clients, the trucking company will send an invoice to the client and await payment over a stipulated amount of time. At times, this duration may be too long, affecting the business cash flow and everyday operations.

To deal with a delay in cash flow, trucking companies embrace financing options such as truck factoring. Factoring helps the business to continue operating normally by supplying the business with cash when clients delay payments. Through factoring, companies can get cash advances to cover their deficits while the factoring company follows up with the clients for payment.

To access factoring services, you must produce copies of your unpaid invoices. Upon validation of your invoices, the factoring company will give you a cash advance of up to 98% of the invoices’ value usually within 24 hours.

From this point, the customer will settle your payments directly through the freight company which will assume responsibility for collecting the cash from your customer.

How Do I Know My Business Needs Truck Factoring?

Understanding your company’s needs will provide valuable insight into whether you need invoice factoring in the first place. In most cases, single truck operators and high volume businesses require factoring. Freight factoring helps bridge the gaps caused by financial constraints between delivery and payment of goods so that a freight business can keep running. 

If you are uncertain whether your business requires factoring company services, you can analyze your credit history issues with your current customer base. Any negative history that affects your business operations calls for factoring.

You should also check your business cash flow. If you notice instances where you’ve had to slow operations or delayed paying your drivers and employees on time due to cash flow gaps, you might need to consider taking up factoring.

If you also cannot fuel all your trucks, maintain them accordingly, or sustain drivers on a payroll, you probably need a factoring company. Finally, if your customers usually pay but their turnaround is slow, you should go for truck factoring to avoid finding yourself at severe inconvenience in the future.

How Does Truck Factoring Benefit My Company?

A truck factoring company will pay your business up to 98% of the value of your unpaid invoice.  Factoring services are usually easy to access, and processing takes a shorter time than ordinary financial institutions.

Truck factoring companies are also customer-focused rather than profit-oriented. This is because they fully understand the damaging effects of payment lags on your business and why your business cannot wait for customers to settle the payments.

Before you select a service, a representative will sit with you and understand your business needs before informing you of the factoring plans suitable for your business. 

By injecting cash into your business, factoring prevents it from stagnation and ensures there is a consistent cash flow to keep your operations running. This, in the long run, reduces your financial stress and shifts your business focus towards maximizing your profits.

How Do I Qualify for Factoring Services?

Qualification terms for factoring services will vary depending on the size of the trucking company. Factoring companies will usually consider unpaid invoices and the creditworthiness of your trucking company.

Unpaid invoices, regardless of the company size, should fall due within the next 60 to 90 days. The factoring company will also review creditworthiness before drafting an agreement with the trucking company and will only agree to finance them if they have a history of good credit.

Factoring companies define small companies as those seeking up to $30,000 per month and high volume clients as those seeking above the same amount.

For a small company to get the factoring services, it should be in business for at least three months, have a credit score of 500 and above, and annual revenue of $100000 or more on average. Usually, it will take two days at most for a small company to qualify for factoring.

For large companies to be eligible for factoring, they should have been in operation over the previous two years and must be creditworthy.  The company’s annual revenue should total $600000 or more on average. Upon approval, the factoring process should take two days.

What Do I Need To Know About Before Choosing a Factoring Company?

While all truck factoring companies offer similar services, the terms are very different, which is why you should be keen on the selection.

Factoring companies have different contract terms, funding, and advance rates. Some firms will require a personal guarantee, while others will consider unpaid invoices. Therefore, before selecting a factoring company, you should ask for these details.

You should also consider your business needs and check whether the contract covers all your requirements.

Understand the Contract

The contract stipulates the time and services you will receive from the factoring company. Some contracts are long-term (up to 36 months), while others will offer you the option to terminate the agreement at any time. You should also be clear on whether there are any fees or fines associated with contract termination in advance before selecting a long-term contract.

You need to be keen on the agreements and check whether the specific types cover your business needs as you would prefer. These agreements include spot, contract, recourse, or non-recourse agreements. If you have a small company, spot factoring, which allows you to choose the invoices you want to factor, should be more than ideal.

For large companies, spot factoring may work in some cases, but contract factoring, which factors all their invoices is suitable. The contract may also stipulate recourse and non-recourse agreements, which apply differently depending on the business’s size.

In most cases, factoring companies will give the recourse agreement where they agree to cover the unpaid invoices for both small and large businesses. However, some companies usually accept the more costly non-recourse agreement, where the truck factoring company will not be responsible for invoices the client fails to pay.

Understand the Rates and Fees

Factoring fees include an advance rate and a factoring fee. These fees will vary depending on your company’s monthly volume, factoring fee structure, and program you choose.

If you are a small company, you will likely pay more than a larger company because most truck factoring companies give volume discounts. Therefore, as your volume increases, your rates will likely reduce.

While analyzing the factoring company fees, you should be aware of some charges, which are not standard for all factoring companies. These include early termination fees, application fees, and minimum volume fees.

Most companies do not charge these and avoiding such might save you extra expenses. With the proper research, you will find a factoring company with the most affordable charges and services for your business.

Understand the Needs of Your Company

Invoice factoring specializes in different client needs and has packages that suit specific needs. These include fuel, repairs, insurance, or cash to purchase more loads. Therefore, if your business needs any of the above categories of finances to keep going, select a package on your contract that will optimally cater to the needs.

The Bottom Line

Truck factoring is invoice factoring for the trucking industry and it is gaining traction among trucking companies as a means of maintaining a steady cash flow when there are delays in client payments.

For other companies, it is an avenue of shifting their focus toward company growth. This is because after entering into a contract with a factoring company, they will usually follow up and collect payments from the customers directly thus saving a trucking business the need to focus on account receivables.

With truck factoring, you will focus more on generating more income; hence, profits and growth. The procedure is more straightforward than getting loans, and processing, which may take about a day or two. Therefore, if you need third party assistance to ensure your business thrives amidst challenging economic times, truck factoring is the way to go.

With a proper understanding of your business, research, and recommendation, you can get truck factoring companies with the best terms and rates for a long-term relationship and business growth.

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