What is Invoice Factoring?
Accounts receivable financing, also known as invoice factoring, is a powerful financial tool that has fueled the growth and success of a number of trucking companies. Factoring enables trucking and owner operators to capitalize on their unpaid receivables by selling them to a factoring company for immediate payment. With factoring, truckload carriers immediately get paid for their invoiced work from the factoring finance company, while the factoring company waits to be paid by the customers. Factoring strengthens a business’ cash position by shortening the time to get invoices paid to just hours and providing the needed funds to meet current expenses and target new opportunities.
Invoice Factoring Benefits
As opposed to loans and lines of credit that require that the client have tangible assets and strong financials, factoring relies more heavily on the financial strength of the clients’ customer. This is a critical feature, since many new and small truck lines do not meet the financial criteria of traditional lending institutions. However, many small businesses have a roster of financially strong customers that can be leveraged. Factoring empowers businesses to capitalize on their customer list, and provides them with a tool to transform outstanding receivables into immediate cash, without generating debt. Since Factoring is not a loan, it is an ideal financial product for the following:
- New carriers and owner operators. Get started without the expense of starting up. Use the factoring company money to pay you fast for invoices and also take care of the back office tasks such as sending out invoices and following up with customers on payments
- Transportation companies are hard to finance until they are very well established and factoring an intangible service like transportation send shivers up most bankers spines.
- Growth is another reason. If you could factor a few of your largest slow paying customers you would leverage that cash to buy new equipment and hire new drivers.
The costs of a factoring transaction – also known as the discount – cary based on many factors but in general the discount is a percentage of the invoice face value. The usual rate is 3.5 percent. But it can go up and down based on amount of business that is factored. The more business the lower the rate.
Non-Recourse factoring is when the factoring company assumes all liability for the debt. These rates are usually higher but there is not what is called “Reserve” taken out and if the customer doesn’t pay them then the carrier is not on the hook for the debt.
Reserve – Reserve is usually 10% of the invoice amount and is withheld until the customer pays the invoice.. So if you factor 1,000 you may get paid immediately for 900 and then the reserve (10%-fee) is paid when the customer pays the factoring company.
Yes factoring companies do make money but they can be used to handle a ot of back office work that makes their fees a little more palatable.