In B2B industries, such as logistics, the financial stability of one company often depends on the initiative of another to pay their invoice. When customers are late to pay, cash flow suffers, and essential expenditures – such as maintaining salaries and important equipment – are hindered.
In these cases, trucking companies often look for financial assistance elsewhere, such as a bank loan or invoice factoring. When cash flow is hurting and you need a reliable push to stabilize your business, invoice factoring is often the best option.
In the content below, we define invoice factoring, explore how the financing option works, and dive into the pros and cons for trucking companies!
What is Invoice Factoring?
Invoice factoring is the process of turning unpaid customer invoices into immediate cash. Once the invoice is officially paid, the seller reimburses the factoring company.
How Does Invoice Factoring Work?
Invoice factoring is a simple process. Invoices are sold to a factoring company for a discounted rate or factoring fee, putting working capital into the hands of the company at the needed time. Once the invoice is paid, the factoring company is reimbursed.
For example:
• Trucking Company A has an unpaid invoice of $1,000.
• Trucking Company A sells the invoice to a factoring company for a 5% fee of $50.
• Trucking Company A receives $950.
• When Company A’s customer pays the invoice, the factoring company receives $1,000.
While exploring invoice factoring options, two variations of invoice factoring should be considered: recourse and non-recourse.
Recourse Factoring
Recourse factoring places the responsibility of collection on the invoice seller (i.e. your trucking company). This means collateral is required. In many cases, recourse factoring companies use your receivables as such. Recourse factoring mimics the process of invoice factoring, and in turn, your company receives immediate cash for unpaid invoices. However, if the customer neglects to pay the invoice, the factoring company may collect the money from you.
As the seller, you are solely responsible for the invoices purchased by the factor and will be responsible for refunding the factor whether your customer comes through or not.
If the customer never pays your invoice, you are left in a similar position as when you first sold the invoice – in need of cash. Because of the risk associated with recourse factoring, businesses often prefer non-recourse factoring.
Non-Recourse Factoring
Non-recourse factoring places the responsibility of collection on the factor. If the customer does not pay, the non-recourse factoring company suffers the loss.
Additionally, this form of factoring does not demand collateral.
Is Invoice Factoring Right for My Trucking Company?
Invoice factoring is often utilized by businesses who work for other businesses – a customer base that doesn’t always pay on time. However, payment procrastination can hurt an organization with employees to pay, equipment to maintain, and growth opportunities to pursue.
For trucking companies, a stagnate cash flow could cripple the business. Although cash flow is important, invoice factoring might not be right for every trucking company. Consider the following questions:
1. Is your cash flow hurting?
2. Are you looking for growth opportunities, such as purchasing trucks or hiring employees?
3. Are you looking for a fast way to stabilize your business?
If you answered “yes” to any of the above questions, invoice factoring could be an excellent choice for your trucking company!
Invoice Factoring Pros
– Invoice factoring is an excellent option for trucking companies working for other businesses, especially those that procrastinate payments.
– As already mentioned, invoice factoring provides trucking companies with fast cash, improving cash flow immediately.
– Invoice factoring is easy to be approved for.
– Non-recourse invoice factoring is collateral-free.
Invoice Factoring Cons
– If working with a recourse factoring company, you may be required to buy back unpaid invoices.
– If your company works directly for consumers, invoice factoring may not be a viable option.
– Certain factoring companies tack on hidden fees to the factoring services, such as late fees or processing fees. Be certain to select a trustworthy factoring company and understand all the terms and conditions before moving forward!
– Because invoice factoring approval is based on the credit history of your customers, you don’t have full control of approval – it depends on the financial strength of your clients.
Is Invoice Factoring Different from Invoice Financing?
Invoice financing resembles recourse factoring, detailed above.
One financial resource states: “Instead of selling your invoices to a factoring company, you use the invoices as collateral to get a cash advance and you remain responsible for collecting payment on the invoices.”
Why Don’t I Just Get a Bank Loan?
Invoice factoring delivers almost immediate approval. With the right freight factoring company, you could get paid within three days. On the other hand, applying for and receiving a traditional loan could take weeks, if your company is approved.
Approval for factoring funding and loan funding differs significantly. For example, banks consider your creditworthiness and the ability to afford payments, while most invoice factoring companies consider the creditworthiness of your customers.
Often, factoring companies take business values into consideration as well. Is your trucking company well-managed and known for integrity? You’re likely to be approved for invoice factoring within a matter of days, regardless of credit history.
Advanced Commercial Capital: Trustworthy Non-Recourse Factoring
At Advanced Commercial Capital, we pride ourselves in being an honest, trustworthy non-recourse factoring solution for trucking companies in need of financial stability.
Our team would love to get in touch with your organization. To learn more about what we do, give us a call at 435.673.4655 or complete our online contact form!