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Freight factoring services – A handy guide for beginners

Freight factoring services  – A handy guide for beginners

Most freight and trucking companies struggle to make their ends meet without a loan or external financial help. This is because clients take around 30, 60, or even 90 days to make payments for services already provided. And if there is no steady capital inflow, caring for trucks or covering business costs can drain your financial reserves. One solution to this problem is freight capital factoring. Read on to find out how.

What is freight capital?
Freight capital factoring is a way of getting paid in cash immediately after the goods are delivered. It is an excellent way for businesses and truck or freight owners to replenish their accounts after delivery. This service provided by freight capital factoring companies is known as factoring a load.

Truck operators or owners can unlock immediate cash against invoices from delivered loads within just 24 hours of the delivery. It means that trucking individuals and organizations will not struggle to cover their expenses and can instead focus on running their business more effectively. Not to mention, with the help of freight capital, businesses can be better equipped to take on more tasks without relying on a bank or external loans.

How do freight capital factoring services work?
The mechanism behind freight factoring is pretty simple. All you need to do as a trucking company is sell your invoice to a factoring company. The factoring company will then verify that the load has been delivered correctly. Once this verification process is complete, they will deposit the amount into your account.

Factoring companies can provide you with your dues in multiple ways. They can transfer the money directly into your account via ACH or wire transfer, or they can provide you with a fuel card. To simplify this entire process, some companies even have their own online portal, which makes submitting the invoice and collecting payments a whole lot easier.

Once the factoring company has paid your invoice amount, it is their responsibility to collect the dues from your client (debtors). If there is a payment default, your trucking business and the factoring company will be jointly responsible for the losses. However, the amount of liability for each is decided based on the kind of program your freight company chooses.

Types of freight factoring
Trucking companies or individuals who provide delivery services have the option to choose from two different types of freight capital factoring:

  • Recourse factoring
    If you opt for a recourse factoring arrangement, you yourself will be held liable for any payment defaults caused by your clients. The only upside to this arrangement is the low fees charged by the factoring company. To minimize risks involved with recourse factoring, most factoring companies provide in-depth credit checks, helping you make an informed decision. Note that this does not protect you from any liabilities as credit can change every week.
  • Non-recourse factoring
    Non-recourse factoring is safer than recourse factoring. Why? Because this form of freight capital factoring protects you in case your client does not pay their dues. Instead, the company providing the factoring services will be held liable for any financial losses due to lack of payment. However, the downside is the high fees you need to pay to safeguard your company from debts. Still, it is worth it if your business is not finically secure enough to take a loss.

Note that most freight capital companies provide both of these services, so it is up to to you to choose the one that suits your needs.

How much does freight capital factoring cost?
Typically, freight capital factoring services cost just a few cents to the dollar. This means that the freight company makes a few cents for every dollar that your trucking business earns. But, the percentage that a factoring service provider charges can change based on different parameters. Some of them include:

  • Invoice amount per month
  • Time taken by your debtors (clients) to make the payments
  • Diversity of customer base
  • Dollar volume each month

It is essential to remember that freight capital is not a loan. It is a way to get easy and quick access to your payment. In exchange for their service, factoring companies minus a small percentage of the invoice before providing you with the cash. The higher the number of invoices you factor in, the lower this percentage will be.

Advantages of freight capital factoring
As mentioned, one of the significant advantages of freight capital factoring services is the immediate access to cash after the delivery. But, aside from this, factoring services have tons of other benefits as well. They include:

  • No debt
    Freight capital factoring eliminates the need for you to rely on external loans and financing to run your business. So you avoid taking on more debts. Factoring also comes with no expectations, such as interests or hidden fees. They only charge a small percentage from your load.
  • Easy money collection
    Another benefit of factoring is that the duty to collect the payment lies entirely with the factoring company. It means that, as a freight company, you can solely focus on making deliveries and building your business rather than collecting money.

Disclaimer: The information available on this website is a compilation of research, available data, expert advice, and statistics. However, the information in the articles may vary depending on what specific individuals or financial institutions will have to offer. The information on the website may not remain relevant due to changing financial scenarios; and so, we would like to inform readers that we are not accountable for varying opinions or inaccuracies. The ideas and suggestions covered on the website are solely those of the website teams, and it is recommended that advice from a financial professional be considered before making any decisions.