When it comes to freight factoring, no one can blame fleet owners for being apprehensive about factoring, especially if they’re not entirely sure how it works. It makes sense to be quite cautious about having a third-party involved in a key part of your business. As a trucker, you want to make sure that you have a trustworthy partner with your best interests in mind, right? So, what is factoring anyway?
Traditionally, a supplier completes a shipment of goods and sends the invoice directly to the buyer. The buyer then has two options: pay for the service at the end of the due date or (more commonly) pay the invoice earlier with a discount.
However, when it comes to freight factoring, the supplier sells its invoices to a third-party after making a delivery, which is typically known as a factor! With this method, the supplier receives a discounted portion of their payment in advance of the actual payment time from whoever the buyer is. In turn, the factor receives a fee that is often a discounted portion of the gross invoice. The fee to the factor is for the purpose of covering the cost of processing invoices/collecting payments as well as the lending cost of funds.
Factoring is used to enhance a supplier’s cash flow. If so many truckers depend on factoring to ensure they get paid in a timely manner while in business with shippers that have long payment cycles, why do people fear freight factoring?
The answer is not that simple and let’s not forget that no two factoring companies are alike. To clear up some misunderstands, here are a few reasons some companies shy away from factoring.
It’s possible that some factoring businesses can impose credit limits on customers to prevent them from defaulting in the future. This can hurt your relationship with the customer and even bar future orders.
It’s important to have an effective process to deal with disputed charges to guarantee that payments are not charged back to you. Make sure you understand how your factor handles these types of charges in order to avoid unnecessary charges.
Some factors are known to hand out penalties for early termination or just make it difficult to end the relationship altogether. Don’t put all your eggs in one basket until you’ve figured out how factoring will work for you long-term. Not all companies lock you into bad agreements!
There are plenty of differences in factoring companies when it comes to flexibility. For instance, some companies require that you factor between $75,000 - $100,000 a month while others don’t have any such minimum requirements.
Some companies wrongfully believe that factors are the same as collection agencies and only factor the slow-paying companies. That means, the longer it takes for the customers to pay the higher the fees you end up paying instead. Try to find out how fees are assessed during different time periods.
Don’t let your uncertainties about freight factoring stop you from learning more. Knowledge will help dispel fears and help you get better cash flow.