The trucking industry is particularly susceptible to recessions and depressions. Since there is an inevitable time delay between when costs are due and when customers pay their invoices, the trucking industry heavily relies on profit volume to cover the difference. A recession or depression quickly exacerbates this delay. Lower profits means that a trucking company has to wait for the next freight load to be paid before it can pay its own expenses. This threatens their profitability and forces them to raise prices, which leads to decreasing profit levels despite the price hikes, as some customers cannot pay higher prices.
Shipping companies can turn to trucking factoring to solve this problem. Each company has accounts receivable for each freight load. The company can sell these accounts to a factoring company for a discounted price. The discount rate is usually between 5% and 10%, but it can be more depending on what the market is doing. For example, accounts receivable worth $12,000 at a 9% discount rate would be sold for only $10,920. The factoring company would then be responsible for collecting on these accounts.
Trucking factoring spares shipping companies from having to take small, unprofitable jobs to cover their cash needs. They can sell their invoices for an immediate profit and concentrate on setting up their next freight load. The factoring company benefits by collecting on the accounts. One drawback is uncollectible accounts. What happens next depends on the nature of the contract between the trucking company and the factoring company.
A recourse contract indicates that the trucking company has agreed to pay all accounts that are uncollectible. Non-recourse means the company has no such liability. The factoring company compensates for this by paying a lower discount rate for a recourse contract than for a non-recourse contract. The trucking factoring company pays the trucking company more money in exchange for the trucking company taking on the extra liability.
Some factoring companies also offer fuel advances. Most trucking companies do fuel advances through brokers, which charge higher rates than factoring companies. The factoring company simply includes the rate for the fuel advance in the discount rate. This is cheaper and less of a hassle. In any economic situation, trucking factoring helps the shipping industry stay afloat.