The freight industry earns $7.91 billion in annual revenue. Unfortunately, its business systems can take anywhere from 30 to 90 days to process payments. This issue is one of its drawbacks in the industry, and many freight companies have to deal with delays in finances.
A solution to this delay is freight financing services that allow businesses to receive payments right away. It is a way of outsourcing a major part of your accounting, and it has additional benefits. Let’s see how it works.
How Does Freight Factoring Work?
A freight factoring company will take your invoices and pay them right away. You’ll receive the total minus percentage fees, usually around 2.5 to 5 percent. Other payment terms may apply, and they differ from company to company. The factoring company will collect your payments when the client or broker pays within the agreed duration.
The factoring service provider also serves a few functions in addition to covering your invoices. They screen the clients and brokers you are working with to rate their payment turnover and trustworthiness. The company also takes care of the extraneous work of follow-ups and payment processing. These services take a significant share of work off of your accounting.
You can operate your business and carry on through the extra 30 to 90 day wait period with the payments already collected. It covers that too-long payment timeframe to maintain cash flow, daily operational expenses, payroll, supplies, and bills, allowing you to focus on running your business.
When it comes to a factoring contract, there are two main conditions you need to understand. The first is recourse factoring, which means the company can collect from you if your client fails to pay them or delays payment further. On the other hand, non-recourse factoring is applied to cover you if your client goes bankrupt or closes down while paying the factoring company.
Business Risks in Freight Factoring
Both recourse and non-recourse factoring conditions are there to protect you and the factoring company. There are always unseen non-payment risks on the part of the broker or the company scheduled to pay invoices direct to the finance factoring company.
The business risk falls more into the side of the factoring company. They already paid your invoices for a flat service fee and wait for the payment date until it’s collected. Many of the clients and brokers are screened and are already deemed trustworthy. But many companies in the industry can be quite unreliable at times.
In some cases, factoring companies resort to recourse to cover unpaid collectibles or until the client pays up. Unfortunately, some companies may experience extra delays from time to time, leading to this recourse option.
How to be Eligible for Factoring Services
There are a few requirements to qualify for this type of alternative financing service. First, each company will post a certain credit score threshold or range to meet. You also have to prepare annual income and other financial documents. The company must also be at least three months or 90 days from its formation. You can usually get a free quote from factoring company sites to give you an idea of how much it can cost.
Running a successful freight company works best if you’re getting paid ASAP for your services. Unfortunately, payment processing in this industry is lengthy for most offices. With factoring, you can get the payments almost instantly and carry on with business.
Time and money simply can’t wait in business. Porter Capital understands the correlation, and our extensive experience in financial factoring will help your freight business run smoothly with better cash flow. Call us today and leave the rest of your financial monitoring to us.