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What is Freight Factoring 101

Mar 26, 2008
Factoring basically amounts to accounts receivables financing. It has become increasingly difficult for businesses, especially new ones, to obtain accounts receivable financing in the face of existing financial and banking practices in today's cutthroat business environment. In this scenario, factoring offers the best alternative way, to obtain the necessary finance.

Freight factoring is a very important branch of the factoring business. The nature of the transportation business is such, that payment for the services rendered is received only after goods are delivered to the client. However, there exists a plethora of cash intensive expenses that all transporters must meet in course of their day-to-day business, whether they are owner operators or freight moving companies. They have to deal with this, irrespective of when their clients pay them, for which they are usually required to wait for anywhere from one to two months, after making the delivery.

These operational expenses include ready cash for fuel, lease/loan repayments, repairs and breakdowns, buying tires, paying drivers and other maintenance and daily expenses. This creates a fund crunch for the transporter /trucking company/freight brokerage agency, which is extremely difficult to overcome, especially when their requirement is an improved and steady cash flow. Bank financing does not offer a viable solution, as it is a tedious and time taking process, involving production of records supporting profitable business, performance in the past. This can prove very difficult for a new transporter or freight broker.

Therefore, if your freight handling/transporting business is at the growing stage and your customers are credit worthy, it is best, if you opt for factoring your invoices as a solution to have cash available to cover the recurring expenses of your company and allow it to grow at a healthy pace. With accounts receivable factoring, you will be able to convert your slow paying receivables into cash, as you get them financed through a reliable freight factoring company. It will provide you with a convenient and flexible line of finance, tied directly to your sales. In other words, the more you are able to sell to reputed and good customers, the more finance will be available to you.

Factoring your freight bills is a fairly simple process. You will first need to establish an accounts receivable factoring agreement with a reputed factoring company. Once this is done, you proceed with billing your customers in the usual manner, and in course of business and submit a copy of the bill to the factoring company for finance of upto an advance of 70 to 90 percent of the value of the invoice. This way you get immediate cash for taking care of your payroll and other expenses and can go ahead with growing and expanding your company, while the factoring company waits to get paid by your customer(s).

Once your customers pay the factoring company, it settles the transaction with you rebating any reserves after deducting its fee. What you need to understand is that credit-worthy customers are the most important consideration for factoring. Your standing with the factor depends on the quality of your customers. Servicing better quality customers will enable you to factor your invoices for a lesser fee and make more finance available to you.
About the Author
Freight Factoring service provider Phoenix Capital Group can help you grow your logistics business. Check out how easy our truck factoring products are to use. Quick factoring quotes can be found at http://www.phoenixcapitalgroup.com
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