Perhaps you aren’t aware of business transportation factoring yet. But don’t fret, as many are still unaware of this term, and even businessmen are unaware of this. You should know that transportation factoring isn’t taught in school, and invoice factoring and freight factoring services are the same.
Many businesses don’t know what transportation factoring offers and how this could benefit trucking factoring companies. That said, it is a vital part of the economy.
The trucking and transportation sector is known for its broader scope compared to other industries. It meets the needs of cargo, passengers, and information as efficiently as possible. Air freight, airlines, marine, motor carriers, freight companies, road and rail, and even OTR trucking play a vital role in the competitive industry.
As factoring takes place in most industries, people should know about this approach. So, in this blog, you will learn more about transportation factoring and understand invoice factoring services, as well as its benefits to businesses these days.
Understanding Transportation Factoring Companies
This is a funding method wherein a freight business sells invoices to a factoring company at a discount. The factoring company would also purchase the invoices and pay almost 100% of its face value in cash within a day.
Factoring businesses are there to solve an issue faced by most freight broker companies and trucking companies. The customers normally take about 2-3 months to settle their bills. The business will pay the employees, purchase fuel, and have some maintenance of their equipment.
Not to mention the risks with regard to handling accounts receivable. Is there a guarantee that you will ever get paid? And even when are you going to get paid? The answer to this matter is simple: the factoring company will reduce the risks, and you will get paid right away.
They will take on the responsibility of collecting the invoice, and once it’s paid, the factor will pay the freight business its balance, less the fees.
The Meaning of Transportation Factoring
Factoring isn’t a loan, and it’s a sale. A trucking business, for instance, business that is just starting up comes with issues. There are a lot of businesses, but there is no sufficient capital to support this start-up business because the customers usually pay for up to 3 months.
And yet, the trucking business has other obligations, like paying expenses for taxes, gas, salaries of employees, and many more. They can’t even get a loan from a bank because their only collateral is the rigs, also financed already.
With that, factoring companies become part of the solution. They provide money to the trucking business based on the number of their invoices. Banks also consider this paper as “too risky”, yet the transportation company sees invoices as a collectable debt. They consider it as an asset that is worth the risk.
And when the owner of the trucking business learns about this factoring business, the owner would find relief that there is already a solution to the company’s cash flow issues. Businessmen will no longer have to wait for how many months to get the payment for slow-paying bills because the factoring company could offer cash right away.
Types of Factoring
There are 2 types of factoring, the recourse factoring, and non-recourse factoring. To better understand these types, read on for more information.
1. Recourse Factoring
It is the transportation company that is responsible for the unpaid invoices. The recourse factoring benefits low rates since the factor doesn’t have liability for customers in default. In fact, large companies benefit more from recourse factoring, as they usually have large cash reserves. They absorb bad debt expenses when their customers do not pay.
2. Non-recourse Factoring
This type of factoring does not remove liability from the transportation factoring company. However, it protects their customers declaring bankruptcy or those who leave their businesses. The liability of the factor for bad debts depends on the factoring company and the contract terms.
You will pay higher fees for this type of factoring to cover liability. It could still be a good option for small to medium trucking companies, especially owners or operators who don’t have the reserves to cover unpaid invoices out of pocket.