If you are a new trucking company, you probably have a stack of bills piling up for all of the goods and services you need to run your business.
Money is unlikely to come in quickly enough to pay all those bills. You know that you need to do something to keep the cash flowing, but your truckers are working full time and you cannot afford to hire new ones.
Standard truck contracts offer companies that need products shipped 30 days to pay their bills. It often takes several months to actually receive your money.
If you are a start-up and you work with other start-ups, it may take even longer to get paid.
If your trucking company is short of change, you may want to consider truck factoring. Factoring companies will buy your invoices at a slight discount and pay you quickly. In many cases, it is in as little as 24 hours.
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What Fees Will I Pay?
In some cases, a factoring company will charge you a percentage of an invoice. In other cases, you will pay a flat rate for each invoice. If you pay a percentage, it will normally be between 1% and 5%.
The percentage that you pay may be based on how old your company is, your average monthly revenue, and the amount of freight that you haul each month.
You will probably have to pay for credit checks for your clients or show the factoring company recent credit checks.
Some factoring companies will require you to sell them a minimum amount of invoices every month. If you do not, you may have to pay an additional fee.
Look for a company that does not require a minimum. The whole point of using a factoring company is to get your cash flow to a point where you will not need them anymore.
According to Simplex Group, some disreputable companies will charge hidden fees. A factoring company may try to charge you a setup or customer service fee.
They might charge cancellation fees if you do not need their services anymore.
Recourse and Non-recourse Factoring
When you first start Googling factoring, you will see the term recourse and non-recourse factoring. If you are like most people, you may not know what that means. It is always best to select a company that offers non-recourse factoring.
A company that offers recourse factoring will hold your business responsible for your client’s invoices if they do not pay.
This can end up costing you a lot of money if you have clients that with financial problems, and this can be devastating to your business.
A non-recourse company assumes the risk of all the invoices they buy. If a company advertises itself as non-recourse, remember to ask them about any potential fees that they charge.
Some companies will say they are non-recourse and try to charge you money at the back end.
Caveat Emptor
When you are shopping for a freight factoring company, you should remember the phrase caveat emptor — let the buyer beware. No government agency regulates the factoring industry.
There are, however, professional associations that monitor the practice. The International Factoring Association assists companies with training, networking, and purchasing power.
They have a standard of ethics to which every member must adhere.
When an industry is not regulated by the government, it is always a good idea to do your due diligence. Interview the factoring company and ask them about their years in business and the number of clients they have.
Read your contract carefully and ask about any fees. If you work with a reputable compliance company, they can do this research for you.
Check Your Clients’ Credit
One of the most important things you should do before signing up with a factoring company is to check your clients’ credit. You only want to do business with companies that are financially stable.
Even if you use a non-recourse factoring company, having clients with good credit is important. A non-recourse company may not accept you as a client if your clients’ credit is bad.
If your clients do not pay their bills, a factoring company may drop you.
Starting a trucking business is expensive, stressful, and costly. However, the rewards can be great. Freight factoring can make the first few years easier.
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