Businesses in the transportation industry often encounter cash flow difficulties due to slow-paying clients. An effective solution to this dilemma is freight factoring, which provides the funding you need to continue operating and even grow your company while waiting for customers to pay their bills. Here are some things you need to know about how this form of financing works.
The Basics of Freight Factoring
Freight factoring involves selling your unpaid invoices to a factoring company in exchange for the funds you need to keep your business running. When you and the factor make a single installment transaction, you receive full payment for an invoice minus a flat-rate fee, which is typically between 95 percent to 98.5 percent of its value. This factoring method is more expensive, but you receive more funds up front. Alternatively, with two-installment transactions, you receive an advance of 90 to 95 percent of the value of the invoice immediately, and the factor sends you the rest minus its fee once your customer pays in full.
The Difference Between Recourse and Non-Recourse Factoring
Recourse factoring means that if your clients don’t pay their bills, the factoring company can return the invoice to you after a certain period of time. Non-recourse factoring means that if your customer becomes insolvent and can’t pay, you don’t have to reimburse the factor. Before you decide which method is right for your business, consider the costs and other details.
Qualifications for Freight Factoring
Your transportation company can qualify for freight factoring if you have already obtained the licenses and other documentation your business requires. In addition, your commercial clients and shippers need to be creditworthy and your bills need to be free of liens.
Benefits of Freight Factoring
Freight factoring improves your company cash flow so that you have the funds on hand to meet any necessary expenses and handle new orders. It is easier to obtain than other forms of financing, and approval is generally quick. Even carriers that are just starting out can avail themselves of this form of funding.
For more advice on freight factoring, contact Spearing Capital & Consulting, Inc.