Freight bill factoring, or invoice factoring, is not an uncommon practice in the trucking industry. The condensed version of the operation is that a trucking business (typically a small to midsized owner or someone new to the business or looking to expand) sells their invoices on delivered goods to a factoring company who issues a cash advance within 1 or 2 days of receiving the invoice for a percentage of the invoice amount. The popularity of freight bill factoring, particularly among small owner operator trucking companies, is the cash influx which allows you to keep your business thriving instead of sweating out the next month or two until collection on invoices gives you the cash flow you need.
Just like any credit service or lending agency, not all invoice factoring companies operate under the same umbrella of fairness and ethical practices. In many ways, a factoring company can become a vital partner in your financial well being, and selecting a trustworthy companion means considered a few key factors.
First what are your contractual time constraints and what penalties exist for opting out early. Also consider, the tough situation of securing a new factoring partner. Many companies require a 60 day notice of cancellation, and payment in full of all outstanding invoices before terminating a relationship. This type of set up can create a cash crisis that unfair factoring companies can use to force dependency on their services.
Depending on the scope of your current operation, you might look for a factoring company who caters to new, expanding or smaller trucking companies. Obviously these are the types of trucking companies who have the greatest need for factoring and are less likely to qualify for more traditional business loans, but more stringent factoring companies often set minimum monthly requirements and require a complicated and lengthy application process.
Lastly, look for a factoring company who is upfront about fees and factoring costs (i.e. chargeback, start-up, sliding percentage scale for lending). Also make sure you understand whether you are entering into a recourse or non-recourse factoring agreement which determines who is responsible for nonpayment of invoices.
As with any decision you make about the financial well being of your company, do your homework. Factoring is a useful practice in many thriving trucking operations, and has been the means of many a success story. Just make sure you look before you leap.
