In the freighting industry, having constant cash flow is necessary for success. However, invoices in the freighting industry mature in 45 days, contrary to the usual 30 days. Therefore, being able to convert the invoices into cash requires the intervention of factoring companies. In a nutshell, a factor buys your invoices or accounts receivables at a lower price than the full invoice value that they will collect from your clients. There are two types of factoring companies: recourse and non recourse factoring companies.
In recourse factoring, there is an agreement that you will buy back the accounts receivables that your factor can not collect payments. For non-recourse factoring, the factor accepts the risk of your customers non-payment. Non recourse factoring companies have several benefits to a freighting business.
Mitigation against the Risk of Non-Payment
Since your factor agrees to bear the possibility of default on invoice payments, you are insured against bad debts. This means that you can be able to plan on your expenditures appropriately and to settle your debts in time. However, factors will only accept the risks where your clients become bankrupt. If your customers close their door or disappear without payment, you will have to buy back that invoice from the factor.
Collection of Payments
A factoring company collects the cash receivables from your clients on your behalf. They save you the costs that you would have incurred when making collections, while at the same time improving your cash flow position. This enables a small or mid-sized company to operate more efficiently without cash flow problems.
Avoiding Clients with Poor Payments History
Factoring companies can help you in identifying customers that have a poor payments history, meaning your chances of losing cash to customers become slimmer.
Non recourse factoring companies offer various benefits to a small to medium sized trucking company. However, it is your duty to find a freight factoring company offering favorable terms at minimum charges.