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Trucking Companies Are Turning to Factoring Companies for Working Capital
For trucking companies, having enough working capital to buy fuel, pay bills on time and meet employee payroll is crucial. While expenses such as licenses, insurance, permits and routine fleet maintenance can be projected to fit into a budget, other expenses arise without warning and require immediate attention. During times when there is not enough day-to-day working capital to meet the needs of the company, contracting with a reliable factoring company may be the best solution. For trucking companies that have not yet established a good credit record or that do not have a large inventory or collateral against which they can borrow, factoring the company's freight invoices may be the only solution.
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Because Trucking factoring companies purchase freight invoices or accounts receivable from trucking companies at a discount, the credit history of the trucking company is not as important as the credit history of its customers. Trucking companies that apply for factoring usually furnish:
- copies of Motor Carrier authority
- insurance copies
- copies of customer freight invoices and surrounding information
- Larger companies likely will need to furnish organizational documents and financial statements.
Application approval is fast, often the same day that the trucking company applies. Procedures for finalizing a factoring agreement differ among factoring companies. At some point, the factoring company will set forth the complete terms of its offer to factor invoices for the trucking company. Before a representative for the factoring company signs the agreement, a search of public records will be made to ensure that the trucking company is not involved in an ongoing bankruptcy proceeding, that there are no liens on the freight invoices that were submitted and that the companies that were invoiced have acceptable credit ratings.
Past-due invoices cannot be factored. A trucking company can choose to factor current invoices and invoices from future loads once they are hauled. The trucking company often also can decide which loads to factor and which to retain. Most factoring companies require that the trucking company not enter an agreement for factoring with anyone else while under agreement with them. Many also require that once an invoice has been submitted to them for factoring, all loads to that customer continue to be factored.
Usually, trucking companies who factor loads continue to use this service whenever there is need for improved cash flow. Whenever they want to factor a load, they must follow certain procedures. Typically, they will:
Send to the factoring company, by email or fax, customer information and information regarding the load to be hauled, including the agreed-upon rate for the haul.
After the load is delivered, send to the factoring company the bill of lading and any other documents related to the load.
The factoring company has the right to refuse to factor the load if it determines that the customer is a poor credit risk. Otherwise, payment is made to the trucking company according to the factoring agreement, sometimes within 24 hours.
Many factoring companies have specialized databases tailored to efficient handling of accounts receivable purchased by them. Such databases produce lists of follow-up calls to be made each day. Timely calls help pinpoint problems that might exist and aid in timely collection of money owed on each account. What happens when a customer whose freight bill has been factored does not pay depends on the agreement between the trucking company and the factoring company.
Factoring agreements are basically of two types: recourse and non-recourse. In a non-recourse agreement, once a freight invoice is purchased by the factoring company, that company has irrevocable full responsibility for billing the customer and collecting what is owed. The company cannot return a customer's freight invoice to the trucking company and charge the trucking company's account for the unpaid amount should the customer fail to pay his bill.
A factoring agreement with recourse allows the factoring company to recover money from the trucking company should the customer whose freight bill is factored not pay the bill or fail to pay part of it. The trucking company conceivably could be charged more than it received as an advance due to the fact that the factoring company does not advance the full amount of anticipated revenue yet needs to be paid for services rendered. This type of agreement provides more money up front to the trucking company due to lower discount rates, but it carries with it greater risk.
Points to Consider in freight factoring
- Fee structures
- Discounts and fees vary widely from company to company. Some companies impose additional fees every time money is transferred.
- They may have set-up fees for adding new freight invoices to factor and charge substantial fees for early termination of contract.
- There may be additional fees included in the fine print.
Some factoring companies for trucking require that the trucking company factor a minimum monthly dollar total of accounts receivable. If the minimum is not met, hefty fees or penalties may apply. Other companies set no minimum. Some even offer "spot" factoring, whereby a trucking company may select at will which, if any, invoices to factor.
Funding options Besides factoring rates for the same service varying among service providers, rates differ according to percentages advanced and retained and the method by which the trucking company receives funds. There also may be differences that are dependent on timeframes allowable for transfer of such funds. Some factoring companies offer same day funding on completed deliveries for which paperwork is faxed. When funding is provided through fuel cards, often there are hidden fees. Direct deposit to the trucking company's bank account, wire transfers and other methods of funding also may carry charges.
Reputation and dependability of the factoring company Not all companies providing factoring services operate with integrity. By careful investigation, trucking companies can prevent the financial devastation that could result from contracting with a factoring company that treats its freight invoice customers poorly, divulges confidential information to other trucking companies or fails to promptly meet its funding obligations.
Actual costs Costs for freight invoice factoring services vary from approximately 0.69 percent to more than 5 percent of gross income from completed shipments. Often the advance on factored invoices is between 85 percent and 97 percent of the total amount of each invoice. Any remaining balance after discount is paid by the factoring company to the trucking company, minus applicable fees or charges, once the freight customer pays the invoice in full.
Added benefits and incentives | Possibilities include:
- credit information services, including the ability for the trucking company to check a potential customer's credit online at no charge
- flat-rate invoice processing for unfactored invoices
- online access to account information
- packet mailers at discounted rates
- low-cost truck stop scanning services
- discount fuel cards with reduced transaction fees
- referral incentives
- monthly factored invoice volume incentives
How Funding Provided by Factoring Companies for Trucking Differs from Other Types of Funding
Current freight invoices are considered to be assets of the trucking company. The trucking company sells such invoices to the factoring company. There is no loan. Thus the trucking company does not incur debt in order to receive funds. Because no debt is incurred by the trucking company and money from factored invoices can be used any way the trucking company wants, wise use of such funds helps build good credit.
Lenders look at the borrower's ability to repay the loan as well as the credit history of the trucking company and its principal. They often require collateral to secure the loan. Factoring companies put strong emphasis on the freight customer's ability to pay factored invoices.
Factoring companies are not collection agencies and do not want invoices to ever become past due. They work with trucking companies that have customers whose credit ratings are good and who have a reputation for paying on time.
While lenders look at the trucking company's overall ability to repay debt and may set no minimum limit on monthly generation of income from freight shipments, factoring companies prefer to contract with trucking companies that generate more than $5,000 per month in accounts receivable. Those who offer spot factoring are an exception. Total costs of obtaining funds likely are more through factoring than through a traditional loan, but the response is faster and options more flexible with factoring.
Trucking companies that are just getting started in the industry, those that have poor credit and companies that are experiencing rapid growth but cannot justify increased borrowing through past sales and earnings may not qualify for a loan. If they do find someone willing to lend to them, the lender may charge high interest rates and require substantial collateral as security. Liens are then filed on the collateral, tying up property the trucking company otherwise might freely lease or sell. Obtaining funds by factoring freight invoices does not affect the ownership of anything other than the factored accounts receivable.
Making an Informed Decision
Trucking company personnel who are thinking about obtaining funding through either factoring or borrowing are wise to obtain quotes from several sources before making a decision. Wise decision makers thoroughly read all information received, especially the fine print. They jot down all points of concern and all quoted costs, making comparison charts.
After potential funding sources are narrowed down to three or four choices, these decision makers analyze benefits and risks of doing business with the chosen sources. They research the potential of the trucking company to be able to continue without funding and determine whether the costs involved in either a loan or factoring will be worth both short-term and long-term benefits of obtaining instant cash.
Once a decision is reached to proceed but before a binding contract is signed, wise decision makers have the trucking company's attorney review the terms. If there are potential areas of conflict, the attorney obtains written clarification from the lender or factoring company before the contract is signed.
Taking the steps to make an informed decision and reach an agreement that is clearly understood by both parties may seem burdensome, but the benefits outweigh any disadvantages. Remember that a printed, signed contract supersedes verbal agreements and can make what was said unenforceable. Becoming well informed before signing on the dotted line can prevent disastrous consequences and ensure a working, lasting relationship between the company in need of funds and the company providing funds. It is well worth the effort.
At 1st Commercial Credit, we have account representatives specializing in trucking and transportation businesses. Whether your trucking company is running dry vans, reefers, or flatbeds, you must be successful at managing these challenges:
- Maximizing cash flow
- Avoid doing business with slow paying account
- Minimizing uncollectible accounts
These challenges are our primary focus. In addition to factoring your freight bills within 24 hours, we can provide pre-screening of your new or existing freight brokers or shipper accounts, collect your receivables, and provide you with easy to understand, real-time, on-line access to all your factoring data.
1st Commercial Credit is a factoring company that offers freight factoring for the transportation industry. Services may include but are not limited to trucking, air freight, local delivery and freight brokers in the USA, Canada and the United Kingdom.
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