Dealing with freight factoring companies can save your trucking business from the large number of overdue invoices you see on a monthly basis. At the same time, it can prove to be harmful and costly if not taken seriously.
Much like anything else you do for your business, diligence is going to be important to ensure freight factoring is beneficial to you, your drivers, and employees. A lot can go wrong if you aren’t careful, leaving your business exposed to being taken advantage of.
When sifting through the many freight factoring companies available to you, we have a few suggestions on how to prevent anything from going wrong.
Did You Read the Fine Print?
Looking at the rates a freight factoring company offers will often be the biggest ticket item when finding a quality factoring team. However, it’s not the only thing that will matter. Much like when you sign up for any service, you’ll want to read everything down to the fine print to ensure nothing is skipped over.
This is also your opportunity to ask any questions you might have. There could be hidden fees they don’t want you to know about, so make sure you’re not going to dig yourself into a hole that’s difficult to get out of. Otherwise, that 3% factoring rate could end up being around 6-7%.
Transparency is very important, but oftentimes you must also dig deeper in order to reveal what they don’t want you to know.
Does Factoring Constitute a Majority of Your Revenue?
Another common mistake trucking companies make with a factoring service is becoming too dependent on it. Factoring is a highly effective method for maintaining a steady cash flow when you have a few clients that are difficult to get a hold of once invoices are sent. With that being said, it shouldn’t be your main source of revenue.
You have to remember that you’re giving up a small percentage of that invoice to the factor. That means each invoice you factor will come at a cost to your business. You can always try to give your clients an incentive to pay on-time or even early in some cases.
Either way, you should work towards finding quality clients that respect you enough to pay on-time. Factoring can be a part of the solution, but it shouldn’t be the entire solution.
Do You Know the Difference Between Recourse and Non-recourse?
You’ll come across two different types of factoring transactions — recourse and non-recourse. Getting the two mixed up can be detrimental to the whole reason you chose factoring in the first place.
With a recourse transaction, the trucking company will receive an advance and the factor will try to collect the payment from the client. If the client doesn’t pay on-time, the overdue invoice is returned to the trucking company and the advance must be paid back to the factor.
With a non-recourse transaction, the factor will be responsible for the overdue invoice whether or not it is paid by the client on-time. While this is a plus for the trucking company, it will often come at a higher rate.
If you’re looking for the best factoring companies available today, we’ve got you covered. We have top-notch reviewers that scoured the web for freight factoring companies you can trust, so go check out what they found!
References
Straight, Brian. “Common Factoring Mistakes Trucking Companies Make.” FreightWaves, 26 Mar. 2019, www.freightwaves.com/news/cashflow-corner/common-factoring-mistakes.