Factoring is becoming an increasingly popular way for many trucks lines to finance growth. What is factoring? How does it benefit a truck line? How does one go about finding the best possible factoring company to partner with?
Why Factor?
A truck line factors for two main reasons. First, it is a new business and does not have enough equity to go to a bank for a conventional line of credit. Second, the truck line is growing faster than its bank line will allow.
How Does Factoring Work?
Factoring is not a bank loan. It involves a buyer and a seller. The seller (the truck line) sells its accounts receivable invoices to a buyer (the factoring company). The buyer (factoring company) pays cash for the invoices. The result is that the carrier has the immediate benefit of working capital as a result of selling its freight invoices. The factoring company now owns the freight invoices and it invoices the truck line’s customers.
Cash-flow Benefits
As a truck line, you wait on the average of 30 to 45 days before getting paid on freight invoices. You must pay many expenses, such as fuel and wages, on a weekly basis. This often results in a cash-flow issue for you. To make matters worse, spiking prices in areas such as diesel fuel further degrade your cash flow. You may have much of your operating budget tied up in accounts receivable resulting in an empty checking account.
Factoring gets to the heart of the problem. You sell your freight invoices to the factoring company for cash. You now have the benefit of working capital to finance and grow your business.
How Do I Find the Right Factor to Work With?
Start by asking your trucking friends who they like working with. As you investigate their referrals, you’ll find that customer service, a fair, easy to understand contract and complimentary benefits are important points to consider when choosing a factoring company.
Customer service is the most critical consideration in a long-term factoring relationship. Does your factoring company understand your business? Will it bend the rules a little when you are in a jam and need fuel money for a long weekend? Will you be working with one account representative who will know your business needs? Many factoring companies do customer service “on the cheap” and prove difficult to work with over the long run. Good customer service should include a willingness of the factoring company to do what it takes to help your business grow. Remember, your factoring company will be working with your customers. Poor customer service from the factor may imperil your customer relationships.
It is important to carefully review a factoring company’s contract. Are there minimum monthly fees? Can you get out of the contract without paying a hefty penalty? Is the language in the contract clear or does it require a lawyer to understand? How are your rates structured? Understanding the contract gives you a clear picture of your factoring company’s character and the true cost of financing through factoring.
Finally, look carefully at complimentary benefits of your potential factoring company. Does it help with collections? Does it give prompt credit feedback on shipping prospects that you are considering? Does it offer credit information online that is free and easy to understand? Are accounting reports readily accessible? Is your business easier to manage because of factoring or is it more complicated? These additional benefits can make the difference between a good factoring relationship and a poor one.
The right factoring partner will make your job easier and help grow your business. The wrong partner may put your business in jeopardy. Taking the time to investigate your factoring options will help your factoring relationship be successful long-term.
Still have questions about factoring? Give me a call or email me, and I’d be happy to help you.
Krisha Newham is Director of Communications for RTS Financial Service, a factoring company that specializes in financing transportation receivables. You can email her at knewham@rtsfinancial.com or call her at 800.492.7006.
Posted by rtscredit 
