Freight capital factoring is simply an accelerated payment method for truckers, especially small and medium-size businesses that don’t have the convenience of having to wait for invoices to mature. In an unperfect world, delayed payments and unpaid invoices are part of doing business. Some businesses with better financial structure can cope but for truckers who require constant cash flow to keep their operations moving, any solution that promises advance payment without bottleneck procedures is often considered.
How Freight Capital Factoring Works
When it comes to money lending across traditional financial systems — banks and moneylenders, your credit score is the parameter to determine whether or not you’ll get an advance business capital. Truckers, however, are not subjected that and instead of using credit score, cash advances are computed based on the value of the total invoices are factoring, not the credit score.
The invoice funding process involves three parties — your trucking company, freight customers, and the trucking factoring company. It’s a pretty simple and transparent process where the factor buys unpaid invoices at a discount over face value, and provides advance capital to help businesses maintain stable cash flow for their operations. Briefly, let’s look at how this process works.
Applying for Small or Medium-Sized Freight Capital Factoring Service
Before receiving invoice factoring services, the factor will determine your eligibility by considering several factors, including doing a background check on your customers. Then you wait for the review period and once approved, you enter a financing contract with the factoring company. The agreement will state all the financing terms from the capital advance amount to the dates of issuance.
Initial Advance Business Capital Factoring
After delivering a customer’s freight or services your given an invoice as you’ve already agreed to credit terms. Avail the invoice to the factoring company and receive up to 98% of your invoice, usually the same day — the idea is to make it as quick as possible than traditional lenders.
Factor Follows Up with The Customer for Payment
The moment your factor receives your invoice, they began the payment recovery process and your customer has to honor the outstanding invoices. Here, a factor has all the rights to receivables that you well agreed too.
Payment of The Remaining Balance
Once your customers pay the freight capital factoring company, they will deduct their service fee — monthly factor rate, and send you the remaining balance. That’s basically how invoice factoring works.
Elements that Determine Factoring Rates
Monthly factoring rates are computed based on several factor’s risks associated with the buying of invoices from truckers, and the factoring volume. Essentially, low volume and high-risky transactions get high factoring rates while transactions with low risk and high factoring volumes attract low factoring rates. Here are some of the factors that determine your rates for capital factoring.
- Factory Minimum is the volume of the invoice you’ve agreed to be factored within a particular period, often monthly. It’s an essential consideration a factoring company will use to determine the rate since the financial arrangement is volume-based. So the higher the volume you factor per month the better discounts and rates you get.
- Average Invoice Size Freight capital factoring is a labor-intensive process and so if you’re looking to get enjoy better factor rates especially with high volumes, ensure to compile your invoices so the cost of factoring make sense. The good thing about factoring high volumes, even if you have multiple invoices, is because the revenues generated are enough to cover the processing fee.
- Credit worthiness will to some extent affect the rates you would get from a factoring company although factoring is majorly volume-based.
- The Industry you are operating in significantly affects the rates you’ll get. Low-risk industries such as trucking and staffing which often get lower rates than high-risk industries like health and construction, which attracts relatively higher rates.
- Factor’s Financial Stability Another element that will determine lower rates is the factoring company’s stability and trading history. Companies that have been in the business for long and have good history are considered stable and guarantee better rates. With new companies, however, they might have limited financial muscle to factor all your invoice and often have higher rates.