Most businesses have experienced the frightening pressure of withering cash flow. Whether unexpected expenses appeared, your customers are refusing to pay, or a conglomeration of both circumstances, a multitude of situations can stunt cash flow. Of course, a business can only scrape by from reserves for so long – eventually cash flow is necessary to keep the business alive.

Sometimes, these frightening times coincide with growth opportunities! What should you do if you don’t have the capital to jump on expansion prospects (let alone pay for an equipment repair)? For many companies, financing is the best option. In the logistics industry, freight factoring is a common option.

In the content below, we define factoring and compare factoring with both forfaiting and traditional bank financing, offering insight into which is best for the long-term success of your business.

What is Factoring?

Factoring at its simplest definition is a method of financing, also known as accounts receivable financing or invoice factoring.

Trucking companies often approach freight factoring organizations with multiple unpaid invoices and cash flow needs. When a trucking company approaches the factoring organization, the factor will often purchase unpaid invoices from the company at a discounted rate. The factor will then pursue the client who needs to pay the invoice. Once the invoice is paid, the factor receives the money. Because the invoice was purchased at a discounted rate, the freight factor will come out net positive.

Freight factoring also benefits the trucking company. Waiting for customers to pay invoices can strangle cash flow, inhibiting companies from hiring drivers, repairing trucks, or taking advantage of growth opportunities. Factoring provides the company with immediate cash flow.

Unlike a traditional bank loan, factoring financing turnaround is extremely fast. Factoring companies choose to work with trucking organizations based on the credit history of the company’s clients, not on the credit history of the company itself. This allows for fast financing and higher acceptance rates. Using a factor provides quick cash access – even when banks aren’t willing to lend.

Recourse Factoring vs Non-Recourse Factoring

There are two distinct factoring methods, and both are important to understand when looking for the best factoring company for your needs: recourse factoring and non-recourse factoring.

Recourse factoring puts the responsibility of paying the invoices into the hands of the trucking company. For example, if the factor purchases three invoices and your customer does not pay them, you are responsible for fulfilling that debt. For leverage, the factor will often accept a deposit and hold it until the invoice is paid.

Alternatively, non-recourse factoring puts the responsibility of fulfilling the invoice into the hands of the factor. Once the factor purchases your invoice – typically at a discounted rate – the factor takes responsibility.

Even if the client does not pay, you are not liable for paying the factor or purchasing the invoice back. As you may assume, trucking companies often prefer this method! Non-recourse factoring is safe.

Factoring vs Other Financing Methods

Factoring vs Forfaiting

Forfaiting is another method of export financing. One small business resource writes: in the forfaiting scenario the “export sells its claim on medium and long-term trade receivables to a forfeiter at a discounted rate to receive fast access to cash.”

Because the trade receivables are sold at a discounted rate, the forfeit does not demand a reserve. The responsibility to pay the receivable is not on the importer. In this aspect, forfaiting resembles non-recourse factoring.

If both methods follow similar functions, how are they different?

Factoring and forfaiting have one major difference: factoring can be applied to international and domestic trade while forfaiting only applies to international trade.

Three additional distinctions between both financing methods include:

1. Timing: While factoring is typically applied to short-term accounts receivables, forfaiting involves long-term accounts.
2. Type of Goods: Factoring applies to any variety of normal goods; forfaiting applies to capital goods.
3. Process: Though both financing methods provide companies with fast cash, the processes differ slightly. As discussed earlier, factoring involves the factor of purchasing unpaid invoices from trucking companies at a discounted rate. In contrast, forfaiting involves the forfeiter purchasing rights of trade receivables from an exporter.

Factoring vs Traditional Bank Financing

A traditional bank loan works well for certain companies. However, for those who need cash fast without accruing additional debt, factoring is often the better option.

The lending market is simply not as fast or acceptant as factoring companies. If your trucking company does get approved, the loan is set and may not be enough to ease your financial strain. Additionally, you will eventually have to repay that debt. Factoring allows companies cash flow without strings attached – if you have an invoice to sell, you can earn immediate cash.

Advanced Commercial Capital: Freight Factoring Resource

Need a cash flow boost? At Advanced Commercial Capital, our non-recourse freight factoring service is as-needed and commitment-free. We give our customers zero unpleasant surprises, and therefore, we are the industry leader in factoring for trucking companies.

With over 100 years of combined experience, our team of financial experts has helped hundreds of struggling trucking companies with cash flow needs. We are ready to help your company succeed too.

Contact us for a freight factoring quote today! Give our team a call at 855-465-4655 or complete our online contact form.