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Clearing Through the Cloud of Factoring Myths

By 06.29.21July 1st, 2021No Comments
Clearing Through the Cloud of Factoring Myths

Invoice factoring has been part of the trucking industry from day one. In fact, it has supported numerous industries for thousands of years before trucks were even imagined. Yet, despite its ancient history, invoice factoring is poorly understood by many and clouded in myth. This is quickly changing as today’s business owners are discovering the refined features and benefits of this powerful financial strategy.

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. Following is a list of the most misunderstood myths that still confuse some people who remain unaware of the true nature of invoice factoring.

  1. Only start-ups and small trucking companies benefit from freight factoring
    Freight transportation is a capital intense industry that demands continuous access to working capital to support fleet operations. The ability to effectively manage regular and reliable cash flow has a substantial impact on the success or failure of any trucking company, whether it is a new start-up or an established fleet.

There are many features and benefits that justify the use of freight factoring to improve cash flow – easy qualification and flexible credit limits are just a few of the features that most benefit new and growing trucking companies.

Easy qualification: New start-ups have no credit history and growing fleets may have unbalanced financial ratios that frighten off conventional lenders. No bank will consider lending to a company with no credit history, bad credit history or has a history of poor financial performance. As this describes a hefty sector of the transportation industry from start-ups to large established fleets, non-bank funding is the best option for these businesses.

Because freight factoring is the purchasing of your company’s invoice receivables at a discount, qualification is not based on the financial status of your trucking company, it is based on the credit worthiness of your customers. No matter whether your company is big or small, new or established, growing or transitioning, qualification is fast, simple and easy.

Flexible credit limits: “If you’re not growing, you’re dying” – it’s the mantra that drives a majority of trucking companies to grow and expand operations. But growth takes capital, and that is what holds back many trucking companies from taking on new customers, opening new lanes and expanding fleet operations. Freight factoring was designed exclusively for the trucking industry – providing the ability to increase credit limits as your business grows is a major benefit of this unique funding option. It’s a simple principle:

  • The more your business grows, the more invoices your trucking company generates
  • The more invoices generated, the more access to working capital

Start-up or established, as long as your transportation company is operational, working capital is needed each and every day your equipment is hauling freight. Freight factoring is designed to convert invoices into immediate cash to provide cash flow you can count on.

  1. Factoring companies are all the same
    Its true that all factoring companies provide the same basic function – to improve access to working capital by accelerating your company’s cash flow. However, beyond this basic function factoring companies differ greatly. Each factoring company has an organization and company culture that reflects their industry knowledge, integrity, commitment to customer satisfaction and ability to support your business when times get tough. The factoring company you choose to work with will be your financial partner and a major stakeholder in the success of your business. Ensure the factoring company you choose is the right fit for your business needs.

A golden rule that supersedes all other considerations when choosing an invoice factoring company is simply this:

Choose a freight factoring company – an invoice factoring company that specializes in the trucking industry.

Along with all the normal features and benefits of invoice factoring, the best freight factoring companies also provide:

  • The best rates for trucking companies
  • Additional cost-saving services such as fuel discount programs
  • Fuel advances to cover over-the-road expenses
  • Free credit checks to mitigate bad debt
  • Invoice dispute management

Trucking is a unique industry with unique pain points and barriers to success. Ensure the financial partner you choose understands transportation, how your business works and is structured to provide easy to manage fast, reliable funding without delay or hassle.

  1. Factoring is complicated
    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. The process is extremely simple:

Steps to Immediate Funding

    1. The client company delivers freight to the customer and then sends a copy of the invoice and bill of lading to the factoring company.
    2. The factoring company sends the advance (typically 85% to 100% of the invoice amount) within 24 hours. The balance is kept as the reserve until the invoice is paid in full.
    3. The customer remits payment to the factoring company.
    4. The factoring company refunds the reserve (balance owing) to the client.
  1. Factoring will negatively impact my customers
    Because a factoring company corresponds directly with their 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.
  2. Factoring is unsustainable
    Whereas a commercial line of credit was once considered the best solution 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 business as potential clients. Instead, they prefer to serve the funding needs of big business and large corporations. These larger clients are financial more stable and definitely more profitable.

At one time, factoring was considered a short-term financial strategy to build a better credit score and improve their financial standing in an attempt to become more bankable. This is no longer a viable strategy and with the improved features and benefits of freight factoring, it is no longer needed. 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. The adherence of restrictive covenants to maintain a bank loan can choke a trucking company’s ability to grow and prosper. Freight factoring, on the other hand, stimulates growth by increasing access to working capital as the business grows.

  1. Factoring is expensive
    At first glance, invoice factoring may appear expensive compared to bank financing, but scratch the surface and look a little deeper to reveal the additional benefits that contribute to a better return. A bank loan is simply that – a loan that requires regular payments but offers no additional services or benefits. On the other hand, freight factoring provides:
  • The best factoring rates for trucking companies
  • Cost-free account receivable management
  • A dedicated accounts manager to streamline services and ensure world class customer service
  • Fuel discount programs to deliver huge savings on your largest operating expense
  • Free credit searches to mitigate bad debt
  • Tools, advice and information to help run a better operation
  • Flexibility when times get tough

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?

  1. Every invoice must be factored
    The ability to select individual invoices to be factored is called “Spot Factoring” and 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 to customers frequently. 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 fright bills quickly and thus avoid paying unnecessary factoring fees.

  1. Factoring is the last resort for struggling companies
    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. Freight factoring has evolved to become the preferred funding option for a growing number of truck company owners. 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.
  2. Factoring agreements are inflexible and long term
    It is a major commitment of resources for factoring companies to ensure trucking clients receive fast, reliable funding for each invoice submitted. In order to provide best rates and service, a factoring company needs a formal relationship with their trucking clients to clearly outline roles and responsibilities. A factoring agreement is used to define terms and all costs associated with the factoring of invoices, but these contracts need to be flexible and favorable to both parties.

Just like mattress stores offer a trial period to see if the bedding is a good fit, the best factoring companies offer a commitment free 90-day period to allow trucking companies to try out factoring. If the factoring arrangement is not a good fit, the trucking company can withdraw from the relationship without consequence. The very best freight factoring companies offer a subsequent 30-day cancellation period during which time the trucking company can provide written notice and withdraw without penalty.  This level of commitment free introduction allows for unbiased assessment of service value. Once the trucking company is assured the factoring services are in their best interest, the formal agreement ensures a stable relationship which the factor can leverage to provide best cost and best service.

When looking for the best freight factoring company to be your financial partner, look for a factor that is transparent and acts with integrity. If the factoring agreement you are reviewing is exceedingly wordy, confusing and uses jumbled legal jargon, it may be a sign that the factor is hiding something in the dense legal language. If you don’t understand how everything works, it is best to ask for clarity. How the factoring company handles this stage of the new relationship is a good indicator of how they will handle your business. If the factoring company’s representative does not know the answers to your questions, or is delayed in responding to your correspondence, it is an indication that your business will be managed in a similar fashion.

For more information about freight factoring and how it can help your trucking business grow, visit eCapital.com

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