Transportation Factoring: Problems and AdvantagesPosted by Factor Funding Co. on June 5, 2012
Transportation and freight companies are often hit hard by sudden cash flow problems. The costs of operating a freight company from day to day are quite high particularly as fuel prices increase. If you own a transportation company, what can you do to keep your business running if your customers don't pay their invoices on time? One solution to this issue is transportation factoring. However, before you apply for a factoring agreement, you'll need to learn about the possible problems and the many advantages of the arrangement.
What is Transportation Factoring?
Transportation factoring is an arrangement where you, as the company owner, sell the value of your customer invoices to an external company. The company will pay you most of the total value, usually up to 90 percent, upfront. In return for the cash advance the factoring company assumes ownership of the invoices and begins collecting payments from your customers. In the meantime, you can use the cash for any business purpose you choose. After your customers pay off their invoices, the factoring company will subtract its fee from the remaining invoice amount and then send you the rest.
Benefits of Transportation Factoring
Using invoice factoring offers many benefits for freight companies. For one thing, since you're selling the invoices outright you won't have to be bothered with doing the typical accounts receivable work on your account such as making collection calls or filing forms. The factoring company will do all that for you. Another benefit is the fact that you can get cash based on your invoices within just a few business days rather than waiting up to 60 or 90 days for your customers to pay them off.
Potential Problems That May Arise
While factoring is a beneficial arrangement for most companies there are a few problems that may come up during the process. For example, if your customer never repays the invoice you may be responsible for reimbursing the factoring company for the cash they advanced you. One way to avoid this is to try to get a "non-recourse" factor which is a bit harder to qualify to receive. A non-recourse factor absolves you of responsibility if the customer never pays the invoice. Another potential issue is the reputation of the factoring company. To avoid any possible scams check to see if the company has an established background in the transportation industry before agreeing to a contract.
Despite the possible problems transportation factoring still offers many advantages for freight companies. If you're currently dealing with a cash crunch freight factoring may be just the solution to your short-term cash flow issues.