In the U.S., the trucking industry generates 255 billion in revenue each year. According to American Transportation Research Institute, there are 500,000 trucking companies, but only four percent of these trucking companies have more than 28 trucks. The other 96 percent have 28 trucks or less, and 82 percent have six trucks or fewer. So, trucking is a multibillion dollar industry comprised mostly of small, independent operators.
Why is this information important?
There are two main challenges that trucking companies come across when looking at their business's finances. The first being cash flow and obtaining a business loan from the bank to keep up with payroll, expenses, etc. The second challenge being waiting the 60 to 90 days that it can take for clients to settle their invoices. With the majority of trucking companies in the United States having under 28 trucks, this also means that their teams are relatively small as well. People are wearing multiple hats to try and get things done, tasks may get missed, and scaling is challenging without the proper cash flow backing them.
Having a lack of cash flow can quickly become what is holding you back from onboarding an A-player in your industry, keeping up with payroll, paying vendors, and frankly, growing your business beyond what it is today. Freight factoring is one way to eliminate these obstacles, especially for smaller trucking companies or independent operators.
What Is Freight Factoring?
You've likely heard of factoring in the past, and it is basically a way to create cash flow immediately instead of waiting to collect on all your invoices. The freight factoring company pays you 85 percent or more upfront and then collects the invoice payments for you. Once the payments are collected they send you the rest of the payments, less a factoring fee. The fee normally runs from one to three percent of the dollar amount factored.
Many factoring companies specialize in trucking/transportation/freight forwarding, but the details of their proposals may vary widely. The number of options and the structure of the various agreements can get confusing.
In this article we will provide an overview of what to look at when comparing factoring companies.
You will typically receive funding after the factoring company has received your submitted invoices. Some factors provide same day funding or next-day funding, while others will only fund after verifying your customer's bills, which can take more than 2 or 3 days.
The timeframe in which you receive your funding is one of the most crucial aspects of the contract that you need to consider. If you know that you typically need funding right away, then you will need to look at factoring companies that provide same or next-day funding.
Like any industry, there are varying levels of services when you need to get in touch with a representative. With finances, many people like to have the option of speaking with a person right away. If an issue arises where they need access to their funding sooner than expected or something has gone wrong with their account, having access to a person or a nearby office can be beneficial.
Here at Meritus Capital, we have local offices in a variety or locations. We make a point of interacting with our customers in person as often as we can, and we encourage customers to travel to our offices if it isn't too far for them. For example, we have team members located in Toronto, Canada, and we have a local office in Buffalo, New York. Should our Toronto clients want to make the short trip to Buffalo to visit our office, we encourage them to do so.
The kind of interactions you want to have with your factoring company is important to consider. You do not want to end up working with a company that only offers email support if you're someone who prefers to interact over the phone or in person. Make sure you do your homework before you set up a long-term arrangement.
There are two kinds of factors: non-recourse and recourse. Recourse factors have the option of charging you back for any unpaid invoices, but the non-recourse factors provide credit protection. This is a very common question that comes up when we are speaking with companies about factoring. They want to know what happens should a client's invoice become delinquent and ultimately, become unpaid.
Having credit protection means that you will get paid on the invoice even if the invoice goes unpaid. Since they take on more risk, non-recourse factoring normally costs more.
Especially with a smaller company, it can be difficult to have a backup plan should an invoice go unpaid. It's important to consider what kind of strategy you have in place for unpaid invoices. Will you contact the customer or pursue them for the funds that they owe? Or, will you swallow the cost yourself and move on? Having an established plan of what you will do will help you establish if you will need recourse or non-recourse factoring.
Factoring companies normally provide 85 percent or more when you submit an invoice. They will hold on to the remaining amount until the invoice is paid by the client. Once the invoice is settled in full, they will release the remaining funds, minus their factoring fee. The fee tends to be somewhere between one and three percent.
Factoring fees can come in many different shapes and sizes. The main thing you need to make sure of is that you understand what fees are going to be incurred by doing business with a factoring company. Make sure to ask the right questions! Here are some ways in which fees can be charged:
Make sure you read the contract and understand all of the fees in which you are going to be charged so that you can make a smart decision about which structure is the best and most cost effective for you. The best way to compare proposals is to figure out the total cost of the fees as a percentage of the dollar amount of the factored invoices.
Flat Fees Versus Tiered Rates
The two most common fees charged are flat fees and tiered rate fees. Here is a quick explanation on how they typically work.
Flat fees are really just how they sound. They are when a factoring company charges a one-time flat discount fee for the factoring of the invoice regardless of how long or how quickly the invoice is paid. This can be great, as it provides an upfront knowledge of exactly what your finance costs are going to be, but it can also prove expensive if your customers generally pay quickly.
If a factoring company charges a three-percent flat rate and your clients pay in 60-90 days, well then you are getting quite a good deal. But, if three-percent is charged and most of your clients pay in 7-30 days, well three-percent is a lot for such a short time.
Look over your customer list or aging and think about how long on average it takes for your customers to pay and that will help you in determining whether a flat rate really is a good deal for you or not.
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