Trucking factoring, also known as freight factoring, is when a trucking business sells its invoices to a third-party factoring company at a discount. Rather than waiting for the invoice payment to get cleared, the trucking company receives the amount in a significantly shorter time. Factoring can have various benefits for a trucking company, but to truly benefit from this facility, you must choose wisely. There can be significant differences in factoring services provided by different vendors. We have gathered a collection of suggestions for selecting the appropriate factoring company.
Understand Different Types of Factoring
Before you sign a contract with a factoring service provider, you should become familiar with the different types of factoring. According to Simplex freight factoring, there are two types of factoring: non-recourse and recourse factoring. It helps to make an informed decision if you understand the meaning of these terms.
Suppose the recourse clause is present in your factoring agreement. In such a scenario, it signifies that the factoring company possesses the ability to reclaim payments from you if any of your customers fail to pay within the anticipated timeframe or decline to make payment. When you enter a recourse factoring agreement, the factoring company typically takes a small percentage of the total amount of invoices you submit.
However, if you enter a factoring agreement with a non-recourse clause, you would not be required to pay on behalf of non-paying customers as long as the reason behind the customer’s refusal to pay is either closure or bankruptcy. If your customer refuses to pay in any other circumstances, the factoring company may still recover payments from you.
There is also non-notification and notification factoring. For example, in notification factoring, the factoring company directly contacts your customers and informs them when and where they are required to pay. As for non-notification factoring, the factoring company may use your logo to contact your customers, keeping their own identity private. Many small businesses use this type of factoring when they do not want to reveal to their customers that they are selling the invoices to a third party.
Check Industry Experience
It is important to consider the factoring company’s level of expertise in your specific industry. A factoring service provider with experience in your industry would be familiar with the rules and regulations that apply to your business.
Opting for a company that lacks familiarity or has limited experience in collaborating with other trucking companies within your industry could result in spending valuable time explaining common challenges to them unnecessarily. Instead, you should pick a provider with a solid understanding of your cash flow risks and overall business model.
Also, ensure that you pick a factoring service provider large enough to handle your growing business or can scale with your trucking business. If you choose a small factoring company, you may have to switch to a large factoring service provider as your business grows.
Compare Invoice Factoring Costs
Each company has different factoring rates, so it is essential to consider this aspect when partnering up with a factoring company.
To illustrate, certain factoring service providers impose a monthly minimum for invoices, and failing to meet this criterion may result in incurring an associated fee for your company. If you choose the provider that offers the facility of doing a background check on debtors, the factoring company may also charge an extra fee for this service.
Some factoring service providers have a monthly pricing structure where you are required to make monthly service payments. Additionally, there might be concealed charges including application fees, due diligence fees, contract termination fees, and monthly minimum fees. Ensure you read the contract thoroughly and ask the factoring company about their rates and hidden fees.
It is also important to take into consideration the duration it takes for the factoring company to transfer funds. Some factoring companies transfer funds within a few days of submitting invoices, while others may take longer. That is because those factoring companies could take time to verify invoices before processing them so they can ensure the invoices are authentic.
Review the Terms of Contracts
The factoring contract stipulates the responsibilities of the trucking company and the service provider. Therefore, you should read the agreement thoroughly and understand your trucking company’s obligations before signing it. If you come across a clause in the contract that does not align with your company’s requirements, there may be an opportunity for negotiating the terms with the factoring company.
The contract may incorporate a provision that entails significant fines, which would be your responsibility to pay should you decide to terminate the contract prior to its expiration. Some factoring companies also include a personal guarantee in the agreement which gives them the authority over the owner’s or operator’s personal assets in case the trucking company fails to fulfill its financial obligations included in the contract. Inquire with the company regarding the process of contract renewal as well.
Generally, when a contract is signed with a factoring company, you have chosen whole ledger factoring, which requires you to submit all of your invoices to the factoring company. This saves you the time of collecting invoices. Alternatively, if you prefer not to factor all of your invoices, you have the option of selecting spot factoring. With spot factoring, you are not obligated by a fixed-term contract and can choose to factor in as many invoices as necessary.
Check Company Reviews
When choosing a factoring company, check their website, which you can browse for reviews. You can also ask the factoring service provider for any references you can speak to before making a decision. Avoid choosing a factoring service provider that does not have good customer service. It is always safe to go with a company that has been doing business for a long time and has a good reputation in the industry.
Check All Services Offered by the Factoring Company
Other than standard factoring services, some companies may offer their clients additional services to make the experience more exclusive. For example, the factoring company can provide free credit checks on potential customers to help you decide whether or not you should work with them.
Some factoring services also have online portals where clients can submit invoices. Other services can include referral and fuel card programs and an account manager to help you manage back-office tasks. These types of services can have tremendous benefits for your trucking business.