Freight Factoring Overview
Factoring, or invoice financing, is the process of acquiring payment of a currently unpaid invoice from a third party (the factor) instead of waiting to receive payment.
This form of receivables financing, also known as cash flow financing, is an efficient and cost-effective alternative to traditional bank loans for small businesses.
Factors provide short and long-term financing for the small business owner / operator or their business partner, who uses the receivables to manage their cash flow and fund their business.
Factoring fees are typically lower than bank loans, having a payback period of less than 24 months.
Factoring services are typically provided under a one-year factoring program, which only overlaps with a business’s existing cash flow needs.
Factoring payment terms are based on individual factors’ underwriting criteria for each transaction.
Factoring settlements are typically within 7 to 14 days after they have been received by the business.
Factoring payment terms are typically up to 60 days.
Factoring forms of receivables financing is available for invoices at less than ninety (90) days old.
Factoring is perfect for businesses with liquidation value of less than 50,000, which are typically small businesses.
How Freight Factoring Works
Freight Factoring is a financing method which is used for purchasing inventory for various companies such as trucking companies and industrial companies and warehouses. It is a way of funding by selling receivables of the company, not the physical goods that have been shipped.
Freight factoring is very different from purchasing the goods on stock and also by discounting a percentage of the invoice value of the goods to the factor. This happens by basically selling, quote factoring or shopping the invoices for the company on various factors. Depending on the circumstances, the company can either receive the money in full to the credit of the company or make use of a factoring company which would purchase an amount of receivables from it.
The default factor makes it a lot easier to sell an invoice as it pays a fixed rate of interest for such an invoice. The discount on the invoice is much lower in comparison to other companies making the rates higher than when the invoices are sold on a second hand market.
There are a number of factors who buys invoices from companies and also from other companies, and it is very important, so the invoice is not sold on a second hand market. The invoices will be considered as being sold on a second hand market when the factors can then get hold of it. This takes time, and also the factoring company will not sell it for a good discount.
Freight Factoring Rates, Terms & Qualifications
Freight Factoring is a business process of selling or assigning the risks and obligations of earning freight revenues to an investor, also known as a factoring company or a factor. The buyer of the obligations is known as a factor.
This is a business method of selling a firm’s unpaid receivables. It is the sole means of selling accounts receivables, which are also referred to as accounts receivable invoices. The essence of freight factoring is that the factor will provide a cash advance for the purchase of the uncollected accounts receivable at a pre-determined rate of interest.
A factor will almost always look to purchase credit-worthy customers, where the underlying receivables are typically of large quantities of high cash value (generally with monthly payments). As such, if the factor is requesting an appraisal or estimate of the amount of receivables in order to determine the purchase price, the appraisal needs to be from a third-party company such as a credit reporting agency. A credit report provides the factor with a history of the customer’s payment history based on a report of the credit rating they received for the prior 12 to 15 months.
Freight Factoring turns the risks and the obligation for the deliveries onto the freight factoring company.
Freight Factoring Rates
The rates that freight factoring companies quote you are generally called the “Advances” that you’ll be making. When you shop for freight factoring quotes, they will generally tell you what the current advances are. They do this because if they give you a quote that is too high (higher than the current advances), you would have no incentive to be their customer because they’d be losing money (taking in less in premiums than they paid).
However higher premiums don’t necessarily mean cheaper freight factoring. The freight costs and the time spent varies from one shipment to another. One shipment may take longer and cost more than another shipment. So even if the freight costs are higher, the expenses for shipping a car, etc. might still be lower. And you should also keep in mind that you won’t be dealing with the same freight companies for all your shipments. So the freight cost will vary.
It is important to factor your shipping when buying and selling cars, trucks, motorcycles, boats, RVs, and more because you can always sell your vehicle but you can’t choose not to ship it. If you factor all your shipments, then you will always be up to date and can consult the most up-to-date rates available.
Freight Factoring Terms
A Glossary of Terms
We’ve gone over the basics of what freight factoring is and how it works. In this post, we’re going to look at some of the more common terms used in the freight factoring industry and some of the important documents you’ll come across every time you talk to a freight factoring company.
As you become more familiar with the language of freight factoring, you’ll have a better understanding of what’s going on in your business.
So what is freight factoring anyway?
What Does Freight Factoring Mean?
Freight factoring comes from the idea that the buyer will ship the products to the seller and that the seller will pay the freight forwarder as compensation for storing the product while it’s not being sold on the open market.
That means you’ll pay a freight forwarder to store your products until they are eventually sold by the buyer. In return, you’ll be paid a set amount of money at a later date. There are a few different terms used to describe this relationship, but the most common is the freight factor.
Freight Factoring Qualifications
Freight Factoring is a unique financial account receivables financing technique which works efficiently when your company is behind in its payroll. When you post your freight invoices to your freight factoring company, they determine the exact amount of money which your invoices are worth. This receivables financing rate is the amount that you will receive to cover your total outstanding receivables. However, this receivables financing rate is only applicable until your shipment is despatched. However, as the receivables financing rate will be calculated based on the shipment date, every weekday and every Friday, a further amount of money will be withheld which is known as the default value (or the bad debt value).
For this reason, it's best to always make your shipment on the same Monday and Friday each week to avoid any default value (or bad debt value) being withheld and to avoid any risk of your shipment missing a deadline. Obviously, as with any business financing technique, you must maintain good credit, excellent payment history, hi-liquidity and a stable balance sheet. In the case of diversified freight factoring companies, they will also require the credit worthiness of the customers who are making orders with your company to be assessed.
There are two types of freight factoring companies – of which the types can be divided into the capital-based suppliers and the volume-based suppliers.
Pros & Cons of Freight Factoring
The word freight factoring simply means pooling inventory from multiple manufacturers, and using a single buyer’s credit to purchase parts on a continuous basis.
When you pool your inventory, manufacturers know that they can place partial orders so that instead of waiting weeks or months to receive their payments for their products, they can now get paid the second the order ships. Hence, manufacturers can increase their sales and meet the demands of their clients.
Under normal circumstances, manufacturers are not pay-ables. They do not allow partial payments. If they do, they are tying up a lot of money that they could be using to increase their inventory.
However, if the manufacturer shares the risk with the supplier, then they are not only able to increase their sales, but the supplier can increase their inventory, and you can receive your money in installments.
Hence, you are able to cover more of your obligations, you are able to cover supplies more frequently, and you are able to maximize your earnings.
But not just any supplier can provide this service. It is only a special process that exists when you work with a freight forwarder. A freight forwarder is able to match both the buyer and the seller by brokering the business and the goods. Because of this, the freight factoring system was created.
Most truckers are familiar with factoring and how it works. Truckers and companies often use factoring as an accounting solution to relieve cash flow. Quite often it’s used to offset truck payments and other expenses.
But factoring also works for truckers by allowing them to post receivables worth thousands of dollars after they’ve delivered a truckload of freight, but before they receive payment.
In trucking factoring, the trucker is able to simply store accounts receivable until they receive payment and they don’t have to worry about liquidating slow moving inventory, which is commonly the case in trucking.
Some truckers worry about incurring credit risk when they select an in-house trucking factoring program simply because they don’t understand the initial process. Technicalities, terms, and conditions make it difficult for truckers to fully understand exactly what they’re agreeing to, and they have a tendency to sign the contract without fully understanding what they’re agreeing to. Truckers need advice on how they should choose their trucking factoring partner.