For any small business, invoice factoring improves cash flow and eliminates the challenging chore of collecting payment for invoices. If you typically allow your customers 30 or 60 days to pay an invoice, you may be waiting for payments much longer. With invoice factoring, you can streamline your cash flow and put the money to use in helping you grow your business.

How does invoice factoring work?

Factoring is a business tool that allows you to outsource the process of managing payments in exchange for a small fee. The factoring company advances you a percentage of the outstanding invoices, collects the amounts due, and then pays you the balance minus a fee for their service. For example, suppose you have $50,000 in new invoices issued to your customers. If you employ a factoring service, they would likely advance as much as $45,000 to you, pending their receipt of the funds due. After they collect the invoices, they deduct their fee (often 2-3 percent) from the balance and pay you the remaining amount.

Here is an example of factoring in trucking: Your small trucking business delivers a load for an agreed price of $5,000. You can send an invoice to the broker and wait 30-90 days until they pay you. Or, you can send the invoice to a factoring company, which will pay you at least 90 percent ($4,500), usually within 24 hours. If the factoring fee is three percent, you will get the remaining 7 percent of the invoice when the factor receives it from the customer. That’s another $350.00. In this example, you pay the invoice factoring company $150.00 to receive your payment immediately instead of waiting for it.

Why can’t I collect more quickly from my clients?

Some trucking businesses try to get their customers to pay more quickly because the trucker needs the money to finance the next load. Unfortunately, the industry is known for slow-paying customers. Those customers may have their own cash-flow concerns to deal with, along with tight profit margins and high operational expenses, just like the ones your company is addressing.

Add to that the fact that you are running a trucking operation, not a collection unit. Your team is likely not adept at asking for payments, and they have other duties. Often, the cash flow process is a low priority. Factoring in trucking can significantly affect how quickly and easily you collect the money your customers owe you.

Do I have to use an invoice factoring company for all my accounts receivable?

Some customers may send your payment as soon as they receive your invoice. That’s great, and no doubt you appreciate their prompt payments. With some invoice factoring companies, you can exclude those customers and sell them the invoices you don’t want to make an effort to collect. This agreement is known as spot factoring. In contrast, if the invoice factoring agent requires that you include all customer invoices, that is referred to as whole ledger factoring. Since invoice factoring is a business model, choosing spot factoring may mean you pay a higher fee since you only assign the less prompt payments to the factor.

What if the customer doesn’t pay the invoice factoring agent on time?

Invoice factoring is not debt collection. The invoices you assign to the factor are current bills, not overdue accounts. However, the factoring agent will carefully assess the creditworthiness of your customers and use that information to help determine the fee you pay for their service. If your customers require extensive follow-up, you will pay a higher price for invoice factoring in trucking, as in any other service business.

What happens if the factor can’t collect the payment due?

Invoice factoring can be structured with or without recourse. Invoice factoring with recourse usually costs less than invoice factoring without recourse. That’s because if you allow recourse, the factoring company can return to you for a refund if the customer doesn’t pay. With non-recourse factoring, they are stuck with bad debt if the factor can’t convince the customer to pay the invoice. Not surprisingly, you can expect to pay a higher percentage for non-recourse factoring in trucking.

Does invoice factoring make sense for my business?

The trucking business is labor intensive but also subject to some volatile costs, like fuel, of course. One advantage of factoring is knowing that you can use the money you have earned without a long wait or the uncertainty of wondering how long a customer will take to pay. If you have drivers waiting for their pay, you can’t afford to make them wait for their earnings. But it’s tough to make payroll if your customer doesn’t pay you. Your business can’t grow without adequate access to cash. Factoring may be a good solution for you.

Does it matter if my trucking business has poor credit?

Invoice factoring can help you improve your credit standing because you have faster access to the money you need to pay your obligations on time. And typically, the invoice factoring company has a greater interest in your customer’s credit than in yours since they will collect funds from the customers you work for. However, as a new client of a factoring company, you will be granted a specific credit limit. That limit is the maximum dollar amount for outstanding invoices you can simultaneously have with the factoring company. You may also get individual limits that are specific to individual customers.

What else do I need to know about invoice factoring in trucking?

It’s a good idea to ask the factoring agent how they communicate with your customers. A reputable factor will maintain a respectful relationship with your customers even as they try to collect unpaid invoices. Most important is to ensure that you understand the commission structure, any recourse period, and fees you may face in addition to the commission percentage.