The collaboration with freight factoring companies is definitely accompanied by a wide range of advantages, yet what about the situation when you fail to plan all the details of the partnership? To make an informed choice of whether or not you want to work with a factoring service, and which one, you need to make a calculated decision that will maximize business profits.
These are the same topics we will be discussing here, so you can know all about what freight factoring is, and the advantages and disadvantages it carries with it, so you can decide what is best suited to you, your capital, and operations as well.
What is Freight Factoring?
Factoring your invoices with freight factoring companies involves a freight business selling all or a portion of its unpaid invoices to a factoring company to get instant cash that is almost equal to the amount indicated on the invoices. It is a comparatively simple and quick procedure since the freight company gets the amount instantly or within twenty four hours.
Then, to know how large fleet freight factoring services operate, you will simply need to know the four-step process of freight factoring, in which the whole process is as follows:
Step 1: BOL Collection and Delivery
Here, the transport company picks the consignment and delivers it to the customer and receives a signed bill of lading (BOL) in the hands of the client.
Step 2: Forwarding the Invoices
The truck stop factoring company is provided with the invoice and the BOL and the carrier is free to choose whether to submit all invoices or only some of them.
Step 3: Receiving Cash Immediately or The Same Day
The best freight factoring company examines the invoice and BOL and evaluates the financial history to determine the percentage of the invoice that they will pay to the company within only 24-48 hours.
Step 4: Receiving the Remaining Amount
The factoring company gets the full amount of money when the invoice is paid by the receiver of goods and later after collecting a small percentage of the total invoice value, they pay the remaining to you.
Advantages and Disadvantages Of Working With Freight Factoring Companies
The choice of whether to factor your invoices or not makes the process of obtaining working capital much easier but may leave some individuals in a contract that does not meet their needs. Now we will see the advantages and disadvantages of freight invoice factoring in order to know all the details and make a wise and calculated choice:
1. Cash Flow
Pro: You receive instant cash on your unpaid invoices in as little as 24-48 hours of submitting the invoice and BOL, and this is used to cover operational costs such as payrolls, maintenance, fuel cards for owner-operators, and others.
Con: It is not free because you lose part of the invoice value to pay the freight factoring companies and this is charged by them without much of an option.
2. Debt and Financing
Pro: You are not taking a loan when you get cash in exchange for the invoice which is not an asset, this means that you will not have a debt on your balance sheet, and also you will not have to file anything as a collateral.
Con: Since you are selling your invoices to get quick cash, you will not be able to use them as a collateral in case you want to change the financing options, therefore, your ability to borrow may be limited.
3. Time Management and Business Operations
Pro: The factoring company you are dealing with will take care of the processes and paperwork of invoicing, credit control, amount collection, etc. so that you can concentrate more on running the business than on working with complicated paperwork.
Con: In case your client has any problems with the factoring service like mistakes, questions, or disagreements, it may hurt your relationship with the client, and they are likely to cease the funding. Their right to reject some invoices of a certain client because they consider them to be high-risk is also well within your right to interrupt your cash flow, as well.
4. Customer and Client Relationships
Pro: Your relationships with clients will be better and the efficiency of them paying will also increase in case your decision regarding the factoring service is a professional and polite one.
Con: It is possible that some clients will not feel comfortable with the idea of having a factoring service work with them rather than the freight company itself, which can hurt your business relationship with them, particularly when the factoring service is too pushy.
The Decision To Factor Your Invoices or Not
Being a freight business, the choice of whether to factor your invoices or not determines the path of how you handle and get your finances. However, in case you do decide to select one of the best freight factoring companies, then just ensure that you select the one that has experience with companies and clients similar to yours once you have fully comprehended your needs, goals and finances. The only thing you have to do after is to read the contract and ask questions as you need to make sure that they are able and willing to do it.