What Is Factoring in the Trucking Industry and How to Use It?

The trucking business is the pump that ensures the flow of goods and other items within a country in the same way a heart pumps blood through the human body. However, whereas the heart is instantly rewarded with essential microelements, the owner and truck driver often have to wait several weeks to several months to get paid. Situations like this often result in an inability to continue doing business and severe cash gaps. But there is a remedy that can help businesses to “keep the heart pumping” — and that is invoice factoring.

Such is HMD Financial, a newly founded freight factoring company, which aims to support trucking businesses with secure financing, reduce their risks and at the end of the day help them to succeed in the ever changing reality of today. This is a new company in the HMD group, which also includes HMD Trucking and 6 other entities successfully operating in the US market. To learn more about HMD Financial, please read the following article.

This article seeks to explain the concept of factoring to those who encounter this concept for the first time, however it might be useful for regular users of the service as well. Read it and feel free to contact our experts with any questions that might arise in connection with the services provided by our company and we’ll do our best to help you resolve all your problems and fulfill your most ambitious tasks.

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Contents:

  1. What Is Factoring in the Trucking Industry?
  2. How Does Factoring Work in Trucking?
  3. Why Do Companies Use Factoring?
  4. What Are the Benefits of Freight Factoring?
  5. How Much Does a Factoring Company Charge?
  6. What Is the Difference Between Recourse and Non-recourse Factoring?
  7. How to Choose the Right Factoring Company?
  8. To Freight Factor or Not to Freight Factor

What is Factoring in the Trucking Industry?

What is Factoring in the Trucking Industry?

Before we take a look at the freight factoring definition, we need to understand the meaning of some other terms. The invoice is the key term in the world of freight. This is a document that is signed by the receiving party when the trucker successfully delivers their cargo. It is the evidence that the receiving party accepts the services and intends to pay.

However, the intention itself does not mean that you will get paid immediately — and that is the least enjoyable part of running a freight business. The cash flow is interrupted; you have to live from payment to payment and think about how to pay your employees and cover your expenses.

This means you need to keep closely monitoring your assets and liabilities to manage your funds properly. Not only is this stressful, it’s critical to business growth. Consider this situation:

An attractive deal often comes up while you are waiting for customers to pay. Your entire fleet is loaded with work, and you miss your chance to hire more staff and buy new trucks, as you are still on a tight budget. You cannot grow your business in that kind of situation, as you never have the free cash to invest. Even if you do, you had better save it for the next penniless season.

Is there any way to avoid all this nuisance? Yes — it’s factoring

Is there any way to avoid all this nuisance?

That is exactly why factoring for truckers was created to solve all these problems. In a nutshell, factoring allows you to sell your invoice to a factoring company and receive the invoice amount net of the commission that the company charges for its services. You can then use the advance to close your cash flow gaps and land more deals to help your business grow.

Each party in the factoring agreement gets something out of it:

  • trucking company gets paid sooner instead of having to wait;
  • factoring company collects a commission on each invoice it processes;
  • the customer gets to do business with a reliable company that has financial collateral and will not collapse from force majeure.

What is the Difference between Factoring and a Bank Loan?

Although a factoring agreement may sound like a very good idea, there will always be critics who will prefer traditional methods of boosting their operating assets: borrowing from a bank.

Freight factoring is different from a bank loan. When you take out a loan, you have to return more than you borrowed due to the interest on the amount you owe. You do get your money quite quickly. However, it may take time to pay off the debt, and you may find yourself locked into the loan, with the payments quickly adding up, especially if you are charged a late fee for failing to pay on time. A significant portion of your revenue will always go to the bank.

With freight factoring, though, you only need to pay a small commission immediately. No additional fees or payments are required, and there is minimal risk of fine print or hidden fees. After that, your money will be totally at your disposal. The factoring company does all the waiting and cashes the invoice when it’s time.

How does Factoring Work in Trucking?

How does Factoring Work in Trucking?

The procedure is quite simple. Although the steps can vary from company to company, here is the most common flow:

You fill in and provide a factoring application with all details of the invoice (freight bill). When your request is approved, a factoring agreement is issued and signed.

  1. The factoring company checks the trustworthiness of your clients and selects invoices to purchase.
  2. You get paid for the selected factoring freight bill and enjoy a steady cash flow.
  3. The factoring company waits for your customers to pay for their trucking services.

There can also be a preliminary stage, too. Before truckers agree to ship loads, they can ask a factoring company to do an advance credit check to understand whether the invoice for this job is suitable for factoring. This way, you know if you will be able to sell the invoice even before you agree to do the job and factoring for trucking companies becomes a due diligence tool.

Most factoring companies check the trustworthiness of potential clients, which is an additional benefit to help safeguard your business.

How can Freight Factoring Increase your Cash Flow?

How can Freight factoring Increase your Cash Flow?

So, what is factoring for truckers? Freight factoring ensures a steady cash flow. It allows you to meet your immediate financial needs, such as fuel, maintenance, and payroll — without delay.

It secures your future and stability too, so you can safely invest in new trucks and expand your business. The increased capacity allows taking more contracts with a higher value and with more reliable companies. The number of non-payments decreases, as you can follow your factoring partner’s advice to avoid dealing with shady actors. Also, you no longer need to be on edge waiting for just any contract to survive in the short term. Instead, you can plan for the long-term future of your business.

Why do Companies Use Factoring?

Why do Companies Use Factoring?

Freight companies may use factoring for various reasons. Still, the main one is undoubtedly a steady cash flow. Sustainable funding is obviously the key factor to company durability.

Another reason is that factoring companies can help their clients with back-office work: credit checks, data storage, fuel discounts, and dispatching services. These services are provided for free, but you have to meet the monthly minimum volumes. Sometimes, a longer list of additional services means a higher commission.

Factoring companies handle the time- and resource-consuming task of billing and collecting payments. Small trucking companies do not always have the time or manpower to process the invoice correctly and register the payment accurately. However, factoring companies deal with the procedure on a daily basis, and have the resources and qualified employees required for collecting every single penny.

What are the Benefits of Freight Factoring?

What are the Benefits of Freight Factoring?

Simple and fast payments, these are just some of the benefits of freight factoring. Let’s take a look at the others:

Get Same-Day Payments

This is the most important one among the other benefits of freight factoring. The competition between factoring companies is quite tough, so they try to win over clients with either lower fees or faster payments. Most companies have reached a level of service where an application review takes only 24 hours and the money arrives to the customer’s account the next day at the latest. Top companies even offer their own mobile apps that speed up the process, especially for regular clients.

Reduce the Accounting Burden

Reduce the Accounting Burden

With factoring, the accounting burden is reduced, as the only transaction you need to take care of is selling the invoice. From that point on, you receive the money and distribute it as usual, while the factoring company performs all the steps needed to turn your invoice into cash and receive the profits. This way, the number of operations you need to handle drastically decreases. You can spend your free time processing new deliveries and expanding your business.

Qualified Brokers

As an additional complimentary service, factoring companies often suggest conducting broker checks. This is a profitable activity, as the selection of a qualified broker will guarantee payment. And it is good for you too, as all potentially risky deals will get eliminated, and you will get access to the finest selection of reliable customers. You only need to ensure high-quality transportation and secure a long-standing partnership.

Stop Worrying about Getting Paid

Factoring companies are professional collectors. They have more instruments and trade secrets that help them to clear invoices. Reliable companies also have a decent reputation and a certain influence in the field. This often works well even in those cases where dishonest clients try to weasel out of their liabilities. At the same time, a small trucking business is much easier to deceive, as it may lack the skills required to collect payments.

How Much Does a Factoring Company Charge?

How Much Does a Factoring Company Charge?

Factoring company rates can differ but usually they remain within 5% of the invoice amount. Fees depend on several factors: the monthly volume of receivables, the sum of each invoice to be factored, the trustworthiness of your customers, and the time allocated for payment. Usually, a larger volume is the best way to secure lower fees.

However, even among factoring companies, some try to take advantage of their customers, all the more so because the factoring for truckers is not regulated by the FMCSA. That is why you have to always look for fine print and leave some room for reasonable doubt. Do not be tempted by low commission rates, as it may be a subtle trick. The cost can be inflated by adding other charges, such as invoice, transaction, or aging fees. In the case of an aging fee, the factoring company charges a certain amount for the first month and then adds 0.5% for every week or month of non-payment.

In this situation, you get a large part of your invoice sum immediately but a certain amount is reserved in case your customer delays payment. If the payment is made on time, you receive the reserved money as well.

What is the Difference between Recourse and Non-Recourse Factoring?

What is the Difference between Recourse and Non-Recourse Factoring?

One more important point relating to fees is recourse versus non-recourse factoring. It is vitally important to know the difference between the recourse and non-recourse factoring if you want to avoid sticky situations.

Resource factoring usually goes hand in hand with smaller commission fees, fast access to funds, and the possibility to work with shippers or brokers with a compromised credit history. If your customers are trustworthy, it really might be an option for securing more money.

However, there is a catch. If the factoring company is unable to collect money from your customer within a predefined period, you have to buy your invoice back. And whether or not you’ll be able to receive your payment is another story.

Non-recourse factoring appears to be a better option in this insecure world, as you will not be held liable for an unpaid invoice. Factoring companies do not take the risk just to help their valuable clients. To outweigh the uncertainty, they charge considerably higher fees and may take a few days to screen the payer while you wait for your cash.

However, paying several percent more might not be that much of an issue, especially if it secures an uninterrupted cash flow. After all, no one will knock on your door one day to sell back the invoice.

How to Choose the Right Factoring Company?

How to Choose the Right Factoring Company?

The choice of factoring company might be vital for the survivability of your business. There are a lot of factors to consider: prompt payment, borrowing capacity, program types, advancement percentages, aged invoices, contract termination, and extra fees. All this information should be clearly visible on the company’s website. In addition, personal communication with an account executive may help you to distinguish a decent company from a shady one.

In order to start your factoring journey on the right note, you can choose a well-known company. For example, Apex Capital provides 24/7 factoring, same-day or next-day payments, recourse or non-recourse payments, and a long list of additional free services. TAFS works only with recourse payments, and has a one-hour advance option and a bunch of extra services. RTS Financial can provide you with money within 24 hours, ensure discounts for veterans, and pay at a 97% advance rate.

Alternatively, you could check out HMD Financial, a company that provides services to both shippers and countless owner-operators alike. The service enables the clients to receive up to 99% of qualifying account receivables within a single day of submitting their financing request. No hidden fees, no tricks, no fine print. Besides, it is a member of the HMD group, which is directly involved in trucking. They know everything about freight companies’ needs and how to solve any challenges along the way.

To freight factor or not to freight factor?

To freight factor or not to freight factor?

A freight factoring company, if chosen wisely, can become a real boost to any trucking business, as it ensures a steady cash flow, decreases risks, and protects its customers. It also provides additional bonuses that can save you time and effort.

No need to resort to bank loans to close payment gaps, accumulate high interest-rate charges and create other financial problems. Instead, a successful partnership with a factoring company turns into a must for any ambitious business. We at HMD are ready to become your dedicated partner, as we take care of each and every client, regardless of the size or invoice volumes. And we hope to see you among our valued clients soon.

If you are only starting your business in the trucking industry or have already established yourself in the market and want to expand — we will offer appropriate solutions for both. Please visit the web-site of HMD Financial for more and feel free to contact us with any question or request.

We are a reliable partner, which is ensured by the diversified structure of the HMD group, guaranteeing our corporate financial security independently and helping your business to succeed.

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