When running a freight management business, you have various expenses to meet on a regular basis. From tending to your fleet to paying your employees, your running costs can often go higher than your immediate cash flow.
Going through this experience can be incredibly frustrating when you dispatch regular shipments for your clients, but can’t see their payments coming in for at least a few weeks after fulfillment.
But this is quite a normal situation in the world of freight management, where a bill of lading (BOL) or freight invoice can take 30-90 days to be paid. With that being said, if your business comes up with urgent needs or immediate expenses during this period, it can easily ring alarm bells for your overall operations.
That’s where freight factoring comes in.
By turning to this specialized financing option, you can easily resolve your business’ cash flow problems and turn the pain of unpaid invoices into the comfort of advance earnings.
Interested to learn more? This comprehensive guide to freight invoice factoring has all the answers you need.
Freight invoice factoring refers to a specialized financing mechanism, where you receive capital against any unpaid BOL. This allows you to get cash payments on pending invoices, even if your clients have not fulfilled them yet.
This means that you don’t have to wait for the typical period of 30-90 days in order to access your earnings. Whether you are running short on cash or need to meet urgent expenses, you can factor your unpaid invoices to get quick cash.
Due to this handy feature, invoice factoring has become incredibly important to the operations of freight management businesses all over the world.
When you factor your receivables, you are selling your invoices rather than submitting them as collateral. This is why freight invoice factoring is considered different from a typical loan.
The following aspects work towards setting invoice factoring apart from conventional lending.
Instead of an overtime interest, factoring companies charge a set fee against their services. This fee is decided at the time of your factoring agreement and does not incur more interest overtime. As a result, the capital you receive via factoring is far more affordable than typical lending options such as a payday loan.
When you factor your BOL, you don’t have to put up with lengthy installment plans that are associated with business loans. Instead, when your sold invoices are settled by your clients, the payment directly goes to your financer or factoring company to complete the invoicing process. This immediate fulfillment brings more convenience to the process.
Loan applications can take a few days or weeks to let you know if you are even going to receive your required financing. This is especially true if you want to receive a large amount. On the other hand, freight factoring applications typically get processed within a few hours or a couple of days.
Freight invoice factoring comes in two mechanisms, namely recourse and non-recourse factoring. In recourse factoring, you need to repay your capital even if your clients are unable to settle their invoices. But in non-recourse factoring, your factoring company takes ultimate responsibility even if your clients are insolvent. This reduces your liability for the received financing.
When you want to factor your receivables, the first thing you need is to gather all required data in place. This includes the unpaid BOL and invoices, as well as any relevant details that can show the strength of your clients’ finances.
You can then reach out to a reliable factoring company that specializes in handling these requests for freight management businesses. Since this is a niche financing sector, finding these factoring firms can be a little tricky at first. But it is not impossible.
Factoring companies typically need to schedule a meeting to understand your needs, go through your clients’ credit checks, and discuss their own financing terms. However, these details can easily be fulfilled online for the utmost convenience.
Once your chosen factoring company has completed its internal processes to determine the viability of their partnership with your business, they go ahead with providing you with an answer. If everything checks out, this response brings good news and the promise of immediate cash against your receivables.
While freight factoring provides you with immediate cash against your unpaid invoices, it is important to know that it does not cover their complete value.
Instead, factoring typically provides you with 80-90 percent of your invoices’ total cash value. The rest of the amount is delivered to you when your clients actually process the unpaid invoice. The factoring company also deducts its own fees and charges from this remaining payment.
As mentioned above, the type of factoring you choose can also affect the overall benefits that you can get from this financing mechanism.
If you choose recourse factoring, you are held liable for payments when your clients cannot fulfill their invoices. This type of factoring comes at a higher risk for your business, but it also comes at a lower service fee.
On the other hand, if you go with non-recourse factoring, it protects your company from having to foot the bill of unpaid BOL after their due date has passed. This low-risk mechanism comes at a higher service fee. It is also only available from large scale factoring companies that can afford to cover these scenarios.
Since most freight clients do not process a pending BOL before the period of 30-90 days has passed, freight management firms such as trucking companies are always at risk of cash flow problems. Sometimes, these finance issues can get to the point where they can threaten the everyday operations of a business.
No matter if you run a new trucking company or a seasoned freight management business, you can face such difficulties from time to time. To make matters trickier, these challenges can also present themselves regardless of the size of your freight business.
With the way that it is designed, freight factoring can help you stay away from these cash flow troubles without taking a toll on your long term viability.
The 30-90 day timeframe is a given for any freight business. But if you are working on establishing a fast growth company, you need to cut this window short. Factoring your invoices can help you achieve this goal with ease.
This mechanism can also come in handy if you have limited capital to fall back on and mostly rely on your earnings to make ends meet. By turning to a reliable factoring company, you can smoothen out your earnings timeframe until your business gains significant traction.
By selling your invoices to a factoring company, you can also use your received capital without any restrictions. This is in contrast to typical financing, where you often have to adhere to the investors’ expectations on how you may use your funding.
This means that you can utilize the received cash to support needs including but not limited to your infrastructural costs, your staff payroll, and your marketing campaigns. This makes sure that you can fulfill any plans without limitations.
Running a freight fleet comes with frequent requirements. Even when you have maintenance contracts in place, you often need to foot the bill of extensive repairs, insurance payments, as well as trucking taxes and other expenses.
These needs can often get overwhelming, especially during a season where all these expenditures raise their heads at once. Through freight factoring, you can meet these requirements without feeling like you have walked into a financial cul-de-sac.
Apart from maintaining your fleet in optimal condition, expanding it on a consistent basis spells surefire success for your freight management business. But trucks, vehicles, and vessels don’t come cheap. This can hold you back from growing your business especially in the face of unpaid invoices.
When you factor your BOL through a reliable firm, you can manage your finances to a point where you can gradually meet your fleet expansion requirements. On a long term basis, this helps you meet larger contracts with ease and allows you to grow your business further.
Typical loans are not only expensive, but they are also incredibly hard to obtain. Most of these lending options also come with complex terms, which can make you end up footing interest for years to come.
On the other hand, factoring is a straightforward way to meet the urgent financing requirements of your business. Since the process has transparent terms, clear conditions, and affordable service fee, it surpasses conventional loans in terms of overall advantages.
When you reach out to a reliable freight invoice factoring company, you can benefit from the sheer advantages of the financing option while steering clear of any possible drawbacks.
Since factoring your BOL lets you meet your immediate needs, sets you free from financial worry, and does it all in an affordable way, turning to this mechanism is completely worth it in almost all scenarios.
Choosing wisely between recourse factoring and non-recourse factoring as well as clearly understanding your factoring agreement goes a long way. When you keep all critical aspects in mind, you can ensure to get the most out of your factoring decision.