Factoring for a Trucking Business
If you own a business in the transportation industry and are in need of working capital, you might want to consider factoring as a means of finding that much-needed cash. Factoring, a financial tool which has been used for centuries, is an easy way to increase cash flow without creating debt.
Invoice factoring is simply the sale of your accounts payable invoices to a factoring company to get compensation ahead of the terms of the invoice. Once you’ve generated invoices for services provided, a factoring company will verify the invoice and then pay up to 90% of the receivable amount upfront. Your customer then pays the factoring company according to the terms of the invoice. If there is any balance after the customer pays the invoice, the factoring company will send you that balance, minus a fee. As the business owner, you can choose which invoices you want to sell, though some factor companies will want to buy all invoices from one customer, or will have a minimum number you will have to factor.
While each factoring company will have its own terms and fees, there are two basic types of factoring available. They are recourse and non-recourse factoring. Recourse is the most common of the two types and the most preferred by factor companies. With recourse factoring, should your customer default you will be responsible for the unpaid invoices. Non-recourse factoring, on the other hand, offers you some protection from default. In the event that your customer does not pay you will not be held liable. Non-recourse factoring may sound like the better deal but it often comes with higher fees and can be more difficult to attain. Be sure to review the terms for both types carefully before deciding what is best for your transportation industry company.
What many businesses find appealing about factoring is that in most cases, the creditworthiness of your customer is more important than your own. This makes finding funding possible for those who may not qualify for a traditional loan. It also takes the hassle of debt collecting out of your hands. For single owner/operator businesses especially, saving time by not trying to hunt down owed payments can be important. Finally, invoice factoring is not a loan so it does not create any business debt. Instead, it’s the sale of an asset meaning there is nothing to repay once the money is received. Invoice factoring is a time-tested, legitimate way of increasing cash flow for any business that operates with regular accounts receivable, including the transportation industry.