When business owners are new to the trucking industry, they will start hearing about freight factoring. They are curious about how this works. Many people who own a trucking company say it’s the best thing to happen to the industry in years.
How Freight Factoring Works
Industrial freight factoring is a pretty simple process. At its basic level, it just means that the trucking company delivers the products and then sells the trucking invoice to a freight factoring company. The freight factoring company pays the trucking company immediately.
Because customers are usually slow to pay, freight factoring is a great advantage to the trucking company. Although trucking companies will set their payment terms at net 30, customers uniformly ignore that mandate. The industry standard for payment is right around 40 days. Many customers won’t pay for 90 days.
There is a fee to the trucking company for this service. Fees can be anywhere from 2.5% to 5% per invoice. A trucking company has to figure out if the quick payment is worth the fee they have to pay.
Sometimes freight factoring companies will perform credit checks on customers as a part of their service.
Types of Freight Factoring
A business owner will quite naturally wonder what happens when the customer fails to pay or pays after an inordinate amount of time or perhaps files bankruptcy.
Recourse is the clause in the contract that allows the factoring company to collect from the trucking company when the customer never pays the invoice.
If the trucking company signs a non-recourse contract for freight factoring, then the trucking company doesn’t have to worry. The freight factoring company is stuck with the loss. If a customer goes out of business or files bankruptcy, they have no recourse to try to get the money back from you. Since this scenario is very rare, it’s also rare to sign a non-recourse contract.
If the trucking company signs a recourse contract for freight factoring, any problems with payment revert back and become the problems of the trucking company. Recourse means that the freight factoring company can go back to the trucking company and demand their money back.
It’s important for a trucking company to carefully check the recourse clause in their contract before they sign it. The wording of the clause may cause headaches down the road.
Some freight factoring companies offer spot factoring. This means that the trucking company can pick and choose which invoices they factor. This is a popular option for smaller freight companies.
Can Any Company Use Freight Factoring?
There are qualifications that a trucking company must meet before they can sign up for freight factoring. The freight factoring company will carefully check the credit score for the trucking company. Then the factoring company will do an extensive approval review. Also, the trucking company can’t be a start-up. It has to have been in business for at least 90 days.
Larger trucking companies don’t have to go through such a painstaking review because they have a proven track record for paying their bills.