As a trucking business, you need to find the best way to fund your company and stay afloat during tough times. The main thing you need to look out for is how to choose the best, most reputable, and highest-quality business to help you finance your new company. Let’s see the qualities to look for when selecting the best financial company to help your new business stay and remain successful.
Steps of how to choose the best freight factoring company
Before you can analyze the best qualities of freight factoring companies, you first need to be aware of the main purpose of this method for funding your business – why is it essential in your new business’ life? There are specific details all business owners need to know before choosing freight factoring, such as the steps of how it works, the different types of factoring, how much it costs for the owner, what qualities to examine in potential new businesses, and how to find the right freight factoring business to work with you to expand your company!
What is a freight factoring company?
Freight factoring can seem complicated to those just starting out in the trucking industry, but fortunately for new business owners, it is much simpler than it initially looks on paper. With a simple and easy-to-understand concept that is great for new entrepreneurs and small business owners, this type of freight factoring helps trucking companies stay afloat, earn constant cash flow, and get new clients in this competitive atmosphere.
When choosing a company like ezinvoicefactoring.com, make sure the company has the following qualities and characteristics.
Quality #1 – constant cash flow
Freight factoring companies specialize in financing invoices to provide a constant and steady cash influx to businesses that may not have the best clients in the past, meaning they have to wait a long period to get paid for their work – or they do not get paid at all. Freight factoring companies are essential to startups, small businesses, and corporations alike since they provide a constant influx of income that allows businesses to pay their employees, pay their vendors, and pay for fuel for all of their trucks in the fleet during busy periods.
Companies will usually need funds sooner than the typical waiting period of the invoice. You will find the usual invoice waiting period is either 30, 60, or 90 days – however, some clients fail to pay within the necessary time frame, meaning you are often waiting for thousands of dollars that show up late or never arrive.
New businesses often need the funds as soon as possible to pay the ongoing business expenses that come with daily expenditures as a business. The typical waiting period is between 30 and 60 days – during this time, companies will have to use their own money or pay out of pocket to cover their daily overhead costs, such as paying back vendors, paying employee payroll, finding new suppliers, and obtaining new clients.
Quality #2 – Checking credit history
Freight factoring helps by providing two services simultaneously, which are imperative to a new business starting out in any industry – credit history and account receivables. Receivables are the assets on a bank statement that need to be paid to obtain capital. Basically, this means that the receivables must be obtained before the business can be reimbursed for its services.
The freight factoring company reviews your clients’ credit to determine when they should pay the amount. If the client has a poor credit history, your freight factoring business may ask for payment upfront or during the 30-day waiting period. If your client has a good credit history, the freight factoring company could ask for payment between 60 and 90 days.
The credit reviews allow you to offer credit only to customers and clients you know will pay during that period. By figuring out the credit history and the trustworthiness of our clients, you can ensure you get paid on time during the waiting period. If you do not, you will have to use a freight factoring company to help you obtain payments on time without spending time and effort to go after the client yourself.
How does freight factoring work?
Luckily for new business owners and entrepreneurs, government invoice factoring has a simple setup, meaning it is easy for anyone to figure out and use. If you are nervous about starting this process, don’t be – this method is time-tested and used by thousands of companies around the globe.
Quality #3 – Covering a high % of the invoice
Freight factoring companies finance your receivables by purchasing them, usually covering between 70 and 90 per cent of the invoice at the time of purchase. This cash advance is then deposited into your bank account, so you can receive funds within 3-5 days of the invoice deposit, ensuring you can pay employees and vendors by the end of the week.
- For example, if you have various clients on your invoice list, you may find that Client X has to pay you $10,000 by the 28th of the month. If the 28th rolls around and the invoice has not been paid, the freight factoring business will pay you between 70% and 90% of the $10,000, meaning you will earn between $87,000 and $9,000 in your bank account between 3-5 days. Although this sin to the total amount of the invoice, it provides you with immediate capital to continue business as usual.
The remaining percentage that is kept by the truck factoring company is called the factor’s fee. This fee will usually be between 30% and 10% depending on the trucking company, your business standing, and your client’s reputation. This remaining money is deposited into your account after the client pays the total amount that is due. If your client does not pay, you will unfortunately not receive the remaining balance from the freight factoring services – this is why it is imperative to find and keep reputable clients on your client list.
Recourse vs non-recourse freight factoring
Quality #4 – offering recourse and non-recourse factoring
There are two types of freight factoring used with businesses today – recourse vs. non-recourse factoring. Although both methods are popular, they are popular with people in different scenarios. You need to know which one will work best for your situation before choosing the trucking company and factoring services you require. Each type has its own distinctive pros and cons – let’s see which is best for your business needs.
The main difference between these two types of truck factoring is how the company handles a non-payment by the client. For example, if a client does not pay the money they owe you on your invoice, you can’t just let them get away with it and not earn any capital. In this case, you need to find out how you will reach that capital and who will pay for the client’s mistake.
- Recourse Freight factoring – In a freight recourse transaction, you have to repay the factor. Unfortunately, if you have a long list of untrustworthy clients, you may find you are paying much more with recourse factoring than you wished to. However, if you keep and find good clients with a good history, you will not have to worry about numerous non-payments on your invoice.
- Recourse factoring is typically more popular among bigger businesses that have already established a good reputation and have money to spare if their clients are consistently non-paying their invoices. In most cases, your client is bankrupt, meaning they will not pay back any unsettled debts, leaving you the one in charge of settling the financial score.
- For non-recourse freight factoring, your truck factoring company will pay the invoice for any non-payments by clients on your invoice list. Although this is an excellent short-term solution for businesses just starting out in the trucking industry and who do not have excess capital to spray for their client’s mistakes, this method of factoring is known for having highly high interest rates when it is finally time to repay the debt.
How much does freight factoring cost?
Quality #5 – Low-interest rates
Freight factoring rates are usually determined by the number of invoices, your sector or industry (ex: truck and automotive), your client’s credit history, and reputation at the time of applying for a trucking factor’s services. Factoring is very competitive, so you need to be prepared to show information about the business to make you more favorable against other new business owners and startup companies in your same sector.
In most cases, truck factoring companies offer a monthly rate of between 1.5% and 3.5%, depending on the length of the contract. Although it can be daunting to get into a long-term contract, more extended contracts will often have lower interest rates than short-term contracts since the freight factoring company will have the peace of mind you will be with them for a long period.
Finding a freight factoring company with low interest rates, offering recourse and non-recourse factoring, covering a high percentage of the unpaid invoice, offering credit history examination, and providing constant cash flow are necessary qualities a business needs to give you the required capital to stay afloat.