Trucking factoring is a financial service designed specifically for the trucking industry. It helps trucking companies improve their cash flow in their time of need and implies selling unpaid invoices to a factoring company at a discount in exchange for immediate funds.
According to simplexgroup.net, truck factoring can be vital in keeping your trucking business going without delays due to financial difficulties. If you are unsure whether truck factoring is a good choice for your organization, here is how it works and what you should know.
Invoice Generation and Submission
When your trucking company delivers goods or services to customers, it generates invoices for the completed work, which isn’t always paid immediately. The invoices owed by your customers have payment terms that range between 30 to 90 days.
However, managing fuel consumption costs, other operational expenses, and growth opportunities can be hindered when you don’t have immediate money to pay or invest. To solve this issue, trucking companies can submit/sell their customer invoices to a factoring company specializing in services for the transportation industry.
The factoring company will consider and evaluate the creditworthiness of your customers to assess the risks associated with purchasing your invoices. If the deal is deemed acceptable, they will approve the transaction and offer you a percentage of the invoice’s value, often between 80% and 95%.
From here on out, depending on the agreement signed with the factoring company, whether your customers pay or not the due invoices, or if there are any delays involved, your trucking company may or may not be directly affected.
Payment Collection and Fee Deduction
Once the agreement and the transaction between the trucking company and the factoring company are completed, the factoring company is now responsible for collecting payments from the trucking company’s customers.
The customers no longer need to pay the trucking company directly but rather the factoring company according to the terms on the invoice. When the factoring company receives the trucking company’s customer payments, the remaining percentage of the invoice value, minus the factoring fee, is provided to the trucking company.
The factoring fee differs from one factoring company to another, and the circumstances in which the payment was made in correlation with the agreements stated in the terms of the contract. The fee is usually a predetermined percentage of the invoice value, ranging from 1% to 5% per 30-day period.
Some other factors that the factoring company weighs before accepting a collaboration with your business and elements that also affect additional fees or fee rates include the volume of invoices being factored and the length of the factoring agreement.
In some instances, your truck company might be unable to work with certain factoring companies due to these or other requirements, or you might have to pay additional fees if you fail to meet the requirements stated in the terms of the agreement.
Fees That You Need to Consider
Although truck factoring is a great way to reduce the administrative burden of invoice collections for your trucking company and a way to secure immediate payment cash flow for operational expenses or investments, there are certain fees you should know about.
For example, when you apply for truck factoring, there might be a one-time fee that you need to pay to sign up for factoring. A setup fee might also apply to process the legal papers and provide reports, which is a one-time fee.
To verify the credit history of your company and your customers, you might also have to pay a credit check fee and a processing fee for the application when you submit the invoice and bill of landing.
Other fees may apply based on whether or not you meet the minimum volume requirement or if you want to terminate your contract.