Invoice factoring, also known as accounts receivable financing or freight bill factoring, has been around for a long time. In fact, it has supported numerous industries for thousands of years before trucks were even imagined. Yet, despite the large numbers of businesses that factor their invoices, there are still many invoice factoring myths and misconceptions about this form of business financing.
Of all the industries, trucking has benefitted the most – freight factoring has been developed as a specialized form of invoice factoring designed to meet the exact needs of a capital intense industry. Below, we’ll break down the most common myths and misconceptions about invoice factoring, so you can make an informed decision about what’s right for you as an owner-operator or a trucking company.
Due to the fact that factoring companies work directly with customers to arrange payment of invoices, some company owners are concerned that this process may negatively impact customer relationships. This concern is unwarranted as most customers in today’s economy are well aware that invoice factoring is a mainstream funding option – indeed, they probably already work with other suppliers who also utilize this cash flow strategy. To ensure good relations are respected, choose a factoring company that acts professionally and courteously when verifying invoices and collecting payments.
Factoring service is present in more than 70 countries. Now it is recognized as a reliable business tool in the United States. It is clearly neither new nor unstable.
In the past, commercial lines of credit were considered the best way for trucking companies to access working capital, this is no longer the case. Banks have realigned their credit policies and qualification requirements to eliminate most small businesses as potential clients. Instead, they prefer to serve the funding needs of big businesses and large corporations. These larger clients are financially more stable and more profitable.
Factoring was also once considered a short-term financial strategy to help build a better credit score and improve their financial standing in order to become more bankable. In light of freight factoring’s improved features and benefits, it is no longer a viable strategy. Successful freight factoring companies are not only growing their customer base organically but also improving customer retention – this is due to factoring’s ability to increase credit limits to keep pace with a company’s growth. This is a huge funding advantage as opposed to the restrictive loan covenants that banks impose on lending facilities.
Some owner-operators and trucking companies may perceive this type of financing as expensive. However, when you consider that it’s immediately boosting your short-term cash flow and it’s often much more affordable than an unsecured bank loan, it puts those fees or interest into perspective. A bank loan is simply a loan that requires regular payments but offers no additional services or benefits while on the other hand, freight factoring provides lots of benefits for truckers along with it.
Factoring companies will typically pay you around 80% of the invoice amount upfront as soon as your invoices are raised, with repayment instantly made once the invoice(s) are paid in full. Compared to costly long-term business loans with fixed repayments and high-interest rates, freight factoring is a cost-effective financial strategy to pay bills, cover over-the-road expenses, meet payroll, and support growth. It’s not a case of can you afford freight factoring – it’s a case of can you afford to do without freight factoring?
Factoring is simpler than most bank financing as you will only be charged 2 or 3% of your receivables. Therefore there is no complication and problem in factoring. Only those who have not experienced the convenience of contemporary freight factoring may falsely state that factoring is complicated. In fact, freight factoring is the fastest, easiest path for trucking companies to create regular positive cash flow. Factoring is a type of invoice financing, but it is not a loan. Very simply, invoice factoring is the practice of selling account receivable invoices to a factoring company at a discount in exchange for immediate cash.
Some businesses are reluctant to hand over the control of accounts receivable to a third party. The concern is that the factoring company might use aggressive collection tactics that could upset customers. However, modern factoring companies work in partnership with their clients and will liaise closely with you if there are any issues with the non-payment of invoices. Also, if you so choose, you can elect to retain the responsibility for invoice management.
It is true that factoring usually helps new and small businesses to maintain a stable flow of funds, especially at their initial stage. However, even if you are an established business, factoring will make your receivable better and more efficient. You will receive your cash on time. Today, businesses of all sizes can enjoy the benefits of invoice factoring. Some factoring companies do have minimum volume requirements. Still, many factors will now offer their services to small businesses and medium-sized businesses.
If a factoring company wants to be successful, it is vital that the relationship between a business and its customers remains positive. A reputable factoring company strives to treat customers professionally and respectfully so they can build on their relationship with the business.
You will find some freight bill factoring companies that let you choose which invoices to factor including which clients you factor and when. Spot factoring refers to the ability to choose specific invoices to factor and this is best used by companies in industries such as construction. These companies generate few invoices, but each one is a significant dollar value to be collected.
Trucking companies have a completely different business model and therefore produce a different type of invoice. These invoices are smaller in dollar value and issued frequently to customers. To provide the best factoring rate, invoice factoring companies depend on large volumes of these smaller invoices to generate the revenue needed to return fast cash, deposited directly into your account at the least cost to you.
Your trucking business does not need to factor all its invoices – choose a factoring company that allows the ability to identify specific customers that you do not want their invoices to be factored. With this feature, trucking companies can isolate the fast-paying customers that settle their freight bills quickly and thus avoid paying unnecessary factoring fees.
While factoring is a possible solution for businesses experiencing financial problems, it is more commonly used by growing businesses that need a reliable source of capital. Decades before freight factoring came into being, the factoring of invoices was reputed to be only for trucking companies on the verge of collapse. Rates were high and service was poor. That is now a thing of the past and no longer relevant.
In recent years, freight factoring has become the preferred funding solution for a growing number of owner-operators and trucking companies. By working with a reputable factoring company, owners are now able to concentrate on their core business – operating a trucking company. Now trucking companies can submit invoices for immediate payment and turn their attention back to servicing customers with the confidence that the needed working capital to sustain operations and fuel growth is readily available.
Not all freight bill factoring companies lock you into a long-term contract. With the right partner, you can decide when you want to use factoring. Some factoring companies do require a commitment of 12 or 24 months. However, some companies offer more flexible terms. In some cases, a factoring company will only ask for a commitment of 90 days or less. Flexible factoring agreements like these allow businesses to use factoring as a short-term financing option.
As you can see, there are several invoice factoring myths around but people either have not looked into it fully or have been stung by an unscrupulous factoring company. Factoring offers a flexible, cost-effective, and reliable source of financing for large and small businesses. However, as you can see from the above, there are many misconceptions about invoice factoring. The best advice is to not believe these myths blindly. Instead, talk to a factoring company about your financing needs, and you will probably be pleasantly surprised at what they can offer you.
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