Freight factoring is an arrangement made between a trucking company and a factoring company, in which both parties benefit and are in better situations than they would be without factoring. In essence, a trucking company ‘sells’ some or all of its invoices to a factoring company for an amount somewhat less than the face value of the invoices, and receives immediate payment for them.
This solves an ever-present cash flow problem for the trucking company, which would otherwise have to wait at least 30 days and probably much longer to be paid by clients. The factoring company benefits by receiving a fee for this factoring service, and it then becomes responsible for collecting the invoice amounts from customers.
Why freight factoring is necessary
Without freight factoring, a trucking company is literally at the mercy of clients to pay invoice amounts and to help maintain a steady flow of incoming revenue. While some customers undoubtedly do pay promptly, it’s safe to say that a great many customers also exceed the typical 30 day payment window, stretching it out to 60 or 90 days, and sometimes even beyond that.
In fact, those delinquent customers have the use of your money without paying any interest on it whatsoever, while your trucking company desperately seeks cash flow to pay bills on time and keep the business running smoothly. The moment invoices are issued to customers they represent incoming revenue, but if that revenue is 60 days or more in coming, it does very little for the cash flow problems that occur daily.
Factoring restores the value of those invoices and allows your trucking company to be paid shortly after invoices are generated, which is the ideal scenario for maintaining cash flow. For the cost of a factoring fee, your trucking business can maintain steady cash flow, and enjoy the added luxury of not having to chase down customers to pay on their invoices.