Over the last several years, invoice factoring has gained significant popularity as a means of growing trucking and transportation companies. Customers often take an inordinate amount of time to pay outstanding invoices, and some can take as much is three months to pay you for work that cost you upfront in fuel and payroll costs. Invoice factoring — also known as freight factoring — has become a go-to financial resource for trucking companies of all sizes, because it allows them to turn outstanding invoices into immediate cash. However, not every factor is the same, and it pays to do some research before entering into a partnership with a factoring company.
Recourse or Non-recourse
Knowing that trucking factoring companies can reduce costs it is important to understand the distinction between different types of factoring — since the choice will ultimately come to help or hinder your bottom line. Factoring facilities are typically classified as either recourse or nonrecourse, and it pays to know the differences and which one will work best for your business. Recourse factoring, which is the most common factoring provided to trucking companies, means that you are obligated to buy back the invoice if payment is not made by your customers within a time period specified on your agreement. Usually, the timeframe is 60 or 90 days, but be sure to note the particulars on your agreement.
Non-recourse factoring, on the other hand, while not as common in the industry, is nevertheless something you should be aware of. Non-recourse factoring means that the factor taking on the invoice also takes on all the credit risks for the collection of the invoices you sell to it, which essentially means that they take the hit on an unpaid invoice. Because they’re taking on all the risk, factoring companies that offer nonrecourse options often charge much higher fees, and will implement much more stringent credit reviews compared to companies who offer only recourse factoring. Be highly aware when investigating non-recourse factoring! It is common for non-recourse factoring companies to absorb the loss of nonpayment in one circumstance only; the insolvency of the debtor. If your customer fails to pay for any other reason, the burden of buying back the invoice remains with you. Study your agreement carefully to understand whether a factor is truly recourse or nonrecourse.
Value Added Services
In addition to improving your cash flow, a factoring company might also offer a bevy of value-added services that can help strengthen your trucking business. Some typical value-added services offered by factors such as Accutrac Capital include:
Fast Qualification and Fund Payment: Qualification is easy, as acceptance is reliant on the credit-worthiness of your customers, and not your business. Once qualified, you can often receive your funds within 24 hours.
Credit Analysis and Risk Assessment: Prospective customers always present new opportunities, but there is still an inherent risk that they might not pay their bills. Knowing the credit history and the payment trends of any potential customer gives you insight into the quality of that customer. Many factoring companies, such as Accutrac Capital, offer unlimited free credit checks on potential customers.
Discount Programs & Savings Opportunities: Many factors allow their clients to participate in money-saving programs, helping them reduce business expenses and giving them access to supplies. Fuel cards and other discounts are typical, and the savings from these programs can be significant, so make sure to explore these options before choosing a factor.
If you own a trucking company, and are looking at invoice factoring as a way to improve your cash flow, follow the tips above to make sure you partner with a factoring company that understands your business and can help you grow it.