If you own a small to medium sized business, especially one that depends on your clients to pay invoices in a timely manner to get the liquid cash you need, it can sometimes be hard to plan for the future.
Not having the amount of liquid cash you need to comfortably take care of bills, paying your employees and other crucial expenses can play a real role in keeping you from getting the chance to build and grow your company. After all, it is hard to look confidently and positively into the future if you are currently worried about whether or not you are going to have the cash on hand you need to run your business today.
If this quick breakdown is already making you think about certain aspects of your business, you may be interested to learn about the financing option known as invoice factoring. Invoice factoring can be used to basically any business that uses invoices, but it is perhaps most common within the trucking and freighting company.
For that reason, invoice factoring is also commonly referred to as truck factoring as well as freight bill factoring, reach out to ezfreightfactoring.com to learn more about it.
If you are curious about utilizing invoice factoring to help your company get the liquid funding it needs, you probably have a lot of questions regarding how it works. Well, if that is the case then you have absolutely come to the right place!
Let’s break down precisely what you have to know about truck factoring to help you decide whether or not it is the right route for your business.
What is truck factoring?
While you may assume that any form of financing could be called a loan, truck factoring is technically not a loan. Primarily, small business loans will be based off of the credit score and that history of a business. This can be a major hurdle for certain companies to overcome, especially if they have a less than perfect history of debt or are still fairly new companies.
As previously mentioned, truck factoring is not a loan. However, it could be compared somewhat to a collateral loan in format. The reason for this is because your invoices that are unpaid from your customers serve as the asset that the financing is based off of.
In order to take advantage of a truck factoring company, a trucking company will sell its invoices at a discount to a factoring company in exchange for a lump sum of liquid cash. Depending on the amount tied to the invoices and the size of the company overall, these agreements can be worth anywhere from a few thousand dollars to multiple millions of dollars.
Once the factoring company buys the trucking company’s invoices at a discount, the factoring company then owns those invoices and gets paid when it collects from the trucking company’s customers.
Typically, customers will have between 30 and 90 days to pay those invoices off.
In order to make this a little bit easier to understand, let’s break down a simple scenario that one might find a truck factoring company engaged in. Let’s say that over the span of two week. You transported a certain amount of goods for a company and that company now owes you $25,000. Of course, that company has every intention to pay off that invoice, but it does have a certain amount of time before it actually is due.
The simple psychology between companies not paying off their invoices immediately is the same compared to when individuals do not pay their bills immediately. Sometimes, that gap in time between an invoice being issued and an invoice being paid can render major repercussions for your trucking company. If you need the money now, you could turn to a traditional bank for a loan. Of course that would require incredible personal and professional credit on top of collateral that the lender could sell in the event of a default. Beyond that, there is a very real possibility that the entire process of applying and actually getting financing from a bank loan could take several weeks or even several months.
That’s where truck factoring comes in. With that $25,000 invoice that has been unpaid you can go to an invoice factoring company and it will agree to pay you the vast majority of the total value of the invoice minus a certain percentage known as a factoring fee. In all, factoring fees typically come up to being about five percent of the total value of the invoice.
When you agree & a contract with the factoring company, that company will send you a somewhat reduced percentage of the total invoice – let’s say somewhere around 85 percent – typically within 24 hours of your application being approved. When the truck factoring company gathers the invoice amount from the customer, they will send the remaining balance that they owe.
What is fantastic about invoice factoring is that there is a great amount of flexibility when it comes to the number of invoices that are involved and the value of those invoices. It allows companies such as yours to set up a one time or renewable financing opportunity so that you can always make sure that you have the liquid cash that you need to grow for just a few percentage points of the total value of your invoices.
Remember, the factoring fee – also known as the discount rate – will typically run anywhere between one percent and five percent. The percentage number tied to the discount rate will typically be based on the value of the invoice agreement overall.
Recourse and nonrecourse factoring
Another crucially important thing that someone who wants to utilize invoice factoring should know is the difference between recourse factor and a non recourse factor.
Ultimately, the factor type refers to who is responsible for an invoice that goes unpaid. Of course, the two options here are either your trucking company or the truck factoring company.
if you sign a recourse factoring agreement and the customer doesn’t pay, then your company will have to pay back the unpaid receivable from the factory and company or replace it with another invoice of equal or greater value.
If you sign a non recourse factoring agreement, you will not be expected to pay back or replace any unpaid receivables. Keep in mind that nonrecourse agreements tend to be attached to a higher transaction fee because the factoring company is going to take on a greater amount of risk in this type of agreement.
Reasons to utilize invoice factoring
From this breakdown alone, you probably have a pretty good idea about whether or not invoice factoring would be right for you in your company. However, before we let you go, let’s go over the most basic pros of invoice factoring overall.
Your company gets access to financing fast
Invoice factoring provides a company that needs liquid cash within a matter of business days. Typically, the application approval period takes three to five days. After that, financing can be expected between 24 and 48 hours.
No more worries about cash flow
one real downside to having a cash flow issue is that you end up having to feel like you have to pressure even your most loyal customers to pay their invoices before the due date. This may help you get out of a rut in the short term, but it can cost you incredibly valuable clients over time. Luckily, invoice factoring allows you to have the cash you need so you do not have to worry about cash flow or pressuring clients to pay.
Highly flexible terms and amounts
As previously mentioned, because the value of invoice factor financing is based on the value of the invoices themselves the amount that is given can be completely up to you. Though there are some invoice factoring companies that will want to factor all of your invoices, there are just as many that will let you choose which invoices you want to factor in which you do not want to factor. On top of this, factoring agreements can either be set up as one offs or as a recurring agreement. What this means, is that the amount of money that you get can grow as your company grows.
No collateral required
Unlike some of the most popular forms of business financing, invoice factoring requires no collateral to be put up for companies to get access to the money they need. This means that you will not have to put up anything such as your real estate or inventory that a lender could seize if you fail to pay.
Well there you have it! That is the basic outline of what so many companies decide to utilize invoice factoring to get their hands on the financing that they need. Now that you have an understanding of what it takes and what it offers, now may be the time to continue researching and starting to look for truck factoring companies in your area that could help you get access to the money you need!