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What is Factoring?
This is an agreement whereby a business sells its accounts receivable to a third party monetary company. This third party company is also referred to as a factor. The reason behind this is to enable the business to acquire cash faster than it would by waiting 30 to 50 days for a customer payment. Factoring is also known as accounts receivable financing. However, factoring is not a loan because debts are not accumulated during factoring.
Difference between Factoring and a Traditional Bank Loan
- Factoring takes into account your customer’s credit strength. This is why you can qualify for factoring despite having a low credit score. However, qualifying for a bank loan demands an analysis of the company’s finances, assets and credit history.
- Factoring takes less than a week to set up an account while a loan on the other hand takes even up to two months.
- The amount of money that you are able to finance increases as your receivables increase with a limit restriction.
- In factoring, the rates can be changed as you continue to finance more money. In a bank loan, the annual percentage rate is fixed.
Which Factoring Options are Available?
The factoring options available are recourse and non-recourse. Both of them refer to the party that takes on the risk of payment. A recourse agreement means that you are accountable for buying back the invoice from the third party company if the customer does not pay it for any reason.
On the contrary, a non-recourse agreement means that the third party company will take the loss if the customer does not manage to pay the invoice because of financial complications.
Truck Factoring with Non-recourse
This factoring option sounds tempting from a risk analysis angle. Not every factoring company takes on non-recourse accounts. The ones that do not provide non-recourse factoring normally have various preconditions. Non-recourse factoring is more costly compared to recourse factoring.
Additionally, non-recourse factoring is specifically limited to debtors who are possibly going to pay. In case the debtor has a bad credit history, the third party company will not take on the risk of non-payment. Furthermore, non-recourse factoring does not essentially safeguard your company from any risk of non-payment. Most companies give a non-recourse that applies only when a debtor is bankrupt.
Benefits of Truck Factoring with Non-recourse
You will still receive the money you require, even if your customers don’t pay
Non-paying customers are a liability to any business. With non-recourse freight factoring, the factoring firm takes on all the risks associated with non-payment so that you can retain your working capital.
You will constantly know what you are paying for
When it comes to non-recourse factoring there are no hidden costs. The flat price prohibits you from paying extra regardless of duration of time your freight bill stays open. This means that you can easily combine your factoring expenses with your operating financial plan.
You will be able to save money
Many freight factoring companies offer cut-throat industry low rates for the non-recourse factoring. This means that you will have more money on hand without increasing your debt and without restrictions on how to spend the cash.
Top of Form
Freight factoring is used as a means of raising funds against unpaid transactions or debts thus boosts a business cash flow. It an important source of cash as it increases business liquidity. Factoring freight bills operate in a very simple way whereby the business raises an invoice; the factoring company buys the debt owed to the entity by its debtor. The factor makes an upfront percentage payment to the proprietors, usually around 85%. The factor then collects the full amount of the invoice directly from the business debtor. Once the entire debt amount has been received, the factor avails the outstanding balance to the business. The business, in turn, pays the factoring company a discount charge or an interest plus other related fees. Discussed below are some of the positive benefits of using a freight factoring company to borrow money against open invoices.
Freeing up proprietor’s valuable time in factoring, a business sells its invoices or accounts receivable to a third party, known as a factor and usually an expert commercial financial company. The main reason is so that the business can receive 85% upfront payments without delays – in other words more quickly than it would have by waiting for the maturity of the invoice which can as well be thirty to sixty days. Also, the factoring company handles the business accounts receivables and collects all the payments on behalf of the business. This spares the business proprietors some valuable time that can be used to concentrate on other important business issues.
Able to check customers creditworthiness
Freight factoring companies are expert in factoring freight bills. They are at the same time industry professionals and as such will ensure that the business is most likely to deals only with customers that pay on time. In a nutshell, they check a client creditworthiness and advice the business accordingly.
A factoring company can negotiate better terms with debtors
Engaging a freight factoring company isn’t a secret because even the business debtors are aware of it. The factoring company thus has implied authority to negotiate with the business debtors for better terms of engagements.
It was proven by the experience of many business owners in truck deliveries that running this type of business is almost never easy. This is because one has to face different challenges when dealing in this sector, and not all the times things are as easy as you might thing. It’s true that all they have to do is deliver something from one point to another, but apart from this, there are also things that the owner must take care of.
What many people don’t see is what takes place behind the façade of the business, when the doors are closed and the cars are stopped. We’re talking here about the other aspects of this type of business – the financial aspect, the management aspect and all those other things that matter in this situation.
This is why, when activating in this sector, it is extremely important to have your money flowing constantly, and this is not possible if the clients don’t pay their bills in time. We know it, the business owners know it and you will also know it soon, if you don’t think in advance on how to solve this problem.
Let’s see what is important when making this choice for using freight factoring services to cover for your unpaid bills.
A Fast Response
This is the first thing that you’ll have to look for when choosing this type of service. You want someone who can pay out the bill or the bills when you need the money, not when it suits their needs – otherwise, you would be waiting for the client to pay. Some companies offer the money in less than 24 hours, and this could be very important for you choice.
They need to have a quick response client service, and a non-stop call center would be preferable. You might also be working 24/7 and this could help you out when you have delicate situations. Also, there should be more than one location that deals with this, as one employee for them couldn’t face all the requests done in 24 hours.
The Cash Percentage
This is about how much money you receive when you use a factoring company. Some companies work in two rates usually – one when they receive the bill, and one when the client has paid the entire sum of money. However, you will see that these two rates can range from 25%-75% to 92%-8%. The trick to this is to use a company that pays the biggest sum of money in the first rate.
With a freight factoring company, things get very easy. All you have to do is choose one that is appropriate for your needs, sign a contract with them and use their services. You will be paying a small percentage from the whole sum, but it’s definitely worth it. The simple action is that once you have the contract sign, all you’ll have to do is send them the bills and they will pay the money according to the contract.
A good freight factoring business should show care for their clients. It’s true that the earnings are small compared to what you have to receive, and they will further have to deal with difficult clients sometimes, but it’s all worth it, both for you and for them. Some might call it a win-win situation, and it actually is, once you realize the plenty of benefits that you have when using these services.
Last, but not least, this type of service will always make sure that you have a constant flow of cash. The cash flow is very important in any type of business, but here it is even more so, because you need to cover daily for one cost or another. It’s definitely essential to know that you can trust such a company to pay for your bills on time, so using them will surely be an asset for your development.