How Does The Freight Factoring Process Work?

how does freight factoring process work

If you are in the trucking industry, you have probably heard the term freight factoring. However, you may not know what it is. Simply put, it is selling your invoices so you can get money quickly. 

How Does It Work? 

If your trucking company is falling behind on its bills, you may consider factoring. All you have to do is contact a reputable factoring company to get the process started. They will buy your invoices at a discounted price. You can get your money in as little as 24 hours. You will be able to get money as soon as a load is delivered and the paperwork has been signed. This is a great advantage when you are a new trucking company. 

Different Kinds Of Factoring 

Before you begin looking for a factoring company, you should know several different types of factoring. Be sure to ask what kind of factoring a company offers before doing business with them. 

Non-Recourse Factoring 

Most trucking experts will recommend non-recourse factoring to a new trucking company. The factoring company assumes all of the risks with this type of arrangement. If one of your clients cannot pay, it’s the factoring company that takes the loss. 

This is a huge advantage to a small trucking company because many companies that you will do business with are new as well. They may not be financially solvent, and if they go bankrupt or simply cannot afford to pay you, their failure may end up being yours as well. 

If a factoring company assumes the risk for you, you won’t have to suffer because your client cannot pay their bills. Non-invoice factoring may also include back-office support, including billing and a variety of invoice options. 

Non-recourse factoring isn’t always easy to get. A factoring company will need to see your client's credit reports before they sign an agreement with you. Sometimes, they charge you a fee to run your client's credit. There can often be hidden costs with a non-recourse factoring arrangement. 

You should ensure that the factoring company you choose charges a flat fee. A freight factoring company should have a customer service line that you can call to have your questions answered. You should always be able to talk to a person. 

Recourse Freight Factoring 

As you can probably guess, the trucking company is responsible for their client's debts in recourse factoring. You may wonder why anyone would ever choose recourse factoring. However, many companies that offer this option will offer a smaller fee than companies that offer recourse factoring. 

Recourse freight factoring companies are unlikely to be as picky about the credit ratings of your clients. If you agree to pay when your clients cannot, they’re far more likely to care about your credit rating. 

What To Be Aware Of 

Never do business with a company that has a set-up fee or charges you extra money for set-up fees. Some factoring companies will have a minimum monthly amount of invoices that you must sell them. Freight factoring should aid in your economic recovery, not contribute to it. Only do business with a company that doesn’t have volume requirements. 

Some companies charge invoice fees for every account that you send to them. It is not a good idea to do business with a company that does this because you will only fall into more debt. 

What To Look For In A Factoring Company 

One of the easiest ways to check out any company is to call the board that regulates them or the board responsible for licensing them. According to Simplex Group - Factoring Company for Trucking, there’s no formal government board that regulates factoring. However, they do have to follow the rules and regulations set forth by the Uniform Commercial Code. 

Ensure that the factoring organization you use has been around for a while and is a member of a professional organization or two. Check to see any complaints against them with the Better Business Bureau. You can also ask the company for references from other trucking companies with whom they’ve done business. 

If you are like most trucking companies, you use a compliance company to ensure you’re following all of the rules and regulations required by the Federal Motor Carriers Safety Administration. Having a relationship with a freight factoring company saves you hours of research and stress. 

If you are in the market for a compliance expert, remember to ask them if they can arrange freight forwarding. 

The company you choose should have established relationships with different brokers. They should provide one representative dedicated to your account. You must be able to communicate with them regularly. A good company will provide a monthly report or invoice detailing what you owe them and what you have paid. 

The best factoring companies will offer extras such as a fuel discount program. They may also offer a fuel credit program for your fleet or company vehicles. 

Why Shouldn’t I Just Get A Bank Loan? 

Wondering why not simply take out a bank loan if you are short on funds? Bank loans can take a while to obtain. These banks also have strict requirements. If you miss a payment or several, they may pull your loan and charge you fees and interest anyway. Freight factoring is a way to get money in a hurry with less commitment than a loan. 

Running a trucking company can be rewarding and fun if it is profitable. Freight factoring is a great way for a new trucking company to keep up with its bills without breaking the bank or having to resort to banks.

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