A recession or depression always takes its toll on businesses. Businesses in all industries pursue profits to cover their costs and to finance future purchases, investments and expansions. Downturns cut into profits, which leaves businesses with less money to pay their costs. They raise prices to stay in business, which cuts down on the number of sales made. This cycle continues until companies find a new normal level of profitability when costs and profits stabilize.
The shipping industry plays a crucial role in business. Without the shipping industry, many businesses wouldn’t even exist. When a downturn hits, the shipping industry feels it the most. As profits fall and prices rise, many shipping companies face a real danger of going out of business. This is due to the time delay between when their costs are due and when their customers pay. With decreasing freight orders resulting in decreasing profits, the company’s ability to pay costs is called into question.
Freight factoring eliminates the time delay problem by providing immediate cash to the trucking company. The trucking company sells it’s accounts receivable to a factoring company. The factoring company performs a similar role to that of a collection agency for credit card debt. The factoring company takes on the responsibility of collecting on the accounts and gives the trucking company cash in exchange. The catch is that the factoring company buys the accounts at a discount, usually around five to 10 percent.
This type of business deal has one variable. The freight factoring contract can either be a recourse or non-recourse. A recourse factoring contract holds the trucking company liable for any uncollectible accounts. A non-recourse contract leaves the trucking company completely free of any such liability. The freight factoring company pays more for a recourse contract because they end up paying less if one or more of the accounts turns out to be uncollectible. Factoring companies pay less for non-recourse deals because they do not have this advantage.
An additional service that freight factoring companies offer is fuel advances. The factoring company advances the trucking company an amount of fuel based on a pre-determined rate. The advantage is that the fee is much less than most brokers charge. Freight factoring helps trucking companies stay in business no matter the state of the economy.