Accounting & Finance
How Do Factoring Companies Work for Trucking
If you are a new trucking company owner, you know that cash flow is needed today and every day. Plus, expenses can get very high and keeping up with your bills can seem impossible during the first year or two of operation.
Like any new business, a trucking company has several options to manage its cash flow closely or avoid financial trouble. For example, a trucking company owner may be able to get a loan from a bank, take out a credit card, or, most commonly, use a truck factoring company.
What Is Factoring?
If you were a factoring company, you’d buy other businesses’ invoices at a discount. Many businesses find that factoring is the best way to keep up with bills and cash flow. To keep the cash flow high, businesses accept they need to pay the factoring company, and that’s the trade-off they’re willing to make to have their clients’ invoices paid immediately.
Why Not Just Get A Loan?
There are plenty of banks that offer small business loans. It is common for a small business to get a loan for as much as $600,000 when it first starts out. If a business owner has good credit, they are likely to get a better interest rate on a small business loan than they would if they took out a credit card.
Small business loans can be hard to get. They may require collateral, and you will only get such a loan if you have good credit. Banks tend to prefer to lend money to established companies.
Credit cards have high-interest rates and often have fees if you make late payments. If you take out a credit card to avoid being late with your bills, you may have difficulty keeping up with your credit card and payments.
When you use a factoring company, you will never have to worry about paying them on time. A factoring company buys your invoices at a reduced price, and your clients pay the factoring company. If you get a bank loan, it may take years to pay off. If your business fails, you may still owe thousands of dollars with no way to pay.
A factoring company can buy your invoices one at a time. You do not have to have a long relationship with them. You should be able to sell as many or as few invoices as you would like.
How Factoring Works
The basic concept of factoring is simple, as a business owner, you sign up with a factoring company, and they buy a certain amount of your invoices for a discount. You will normally get money from the factoring company for these invoices immediately. The factoring company will get their money for the invoices when your clients pay their bills.
Recourse and non-recourse
There are two different kinds of factoring; recourse and non-recourse.
- A non-recourse company will assume the risk if one of your clients does not pay
- A recourse factoring company will require you to pay the bill if one of your clients does not pay within a certain time
Recourse factoring is quite a bit easier to get than non-recourse factoring. You should check out your clients and their credit very carefully if you are going to go through a recourse company. It is always best to work with a non-recourse company.
Qualifying for Factoring
No company is going to buy your debt without getting to know a little bit about you first. They will run a credit check on the company’s owners and business.
A non-recourse company will also want to run credit checks on your clients. Even a recourse company will want to know if you and your clients are financially solvent.
If possible, you should do business with a non-recourse company because it presents much less risk to you. If you cannot get a non-recourse factoring company to buy your invoices, you may want to look for other alternatives to solve your financial problem.
What To Look For In A Factoring Company
While there is no official board regulating the factoring industry, there are professional organisations overseeing their members.
A factoring company can join several different professional organisations. Therefore as a business looking for factoring services, look for a company that belongs to the International Factoring Association or a similar organization.
Some factoring companies will have a minimum monthly amount of invoices you must sell. Doing business with such a company is never a good idea as you may lose more money than necessary.
A reputable factoring company will never charge you set-up fees. You should be assigned an account manager to contact whenever you have a question.
Truck factoring is a great way to stay on top of your bills. You will have the cash flow needed so you can concentrate on acquiring clients and hiring drivers when your bills are paid.