How To Start A Freight Factoring Company?

A trucking company often requires the flow of funds to run the business and cannot afford to wait for several weeks or months for payments due from customers. There is always a risk involved in carrying accounts receivables as you are uncertain about  when you receive the payment. In this situation, freight factoring companies provide solutions to enable truckers to get paid much faster.

Factoring is a type of finance in which a trucking business gets payment from a third party by selling the invoices raised to a customer for delivering loads. The third party or factoring company would pay the amount due on the invoices by coordinating with the original customer. The factor will recover the money from the customer later. In this way, you can meet the short-term liquidity needs of the business and do not require following up with customers for payment.

Factoring companies have become quite popular because trucking businesses need cash flow to operate and meet business expenses. Starting a freight factoring company is not a big deal and can be profitable, considering the demand pattern. 

You can qualify for the business and start giving service to truckers seeking a solution for funding support. This article will discuss the process and how to begin a freight factoring company. 

The Factoring Process

Factoring has become a reliable method of recovering money from the customer while running your business. Many companies are there to provide factoring services with mutual consent from both suppliers and customers. You must note that the factoring process involves a few systematic steps to follow in a factoring business. These steps are as follows:

• The trucking owner-operator initiates the process with a factoring company
• The factor notifies their customers to comply with the arrangement.
• The trucker delivers the load for the customer and receives a signed invoice
• The trucking company sends a copy of the invoice to the factoring company
• The factoring company verifies the invoice to ensure that the goods are  delivered as per the contract terms
• The factoring company pays the trucker a percentage (80%-90%) of the invoice value within a few days.
• The factor handles the billing process and collects payment from the customer.
• The factor pays the balance amount after receiving payment from the customer.

Role of Freight Factoring Companies

Transportation businesses needs money to bear expenses that come into the foreground before they get paid by customers for the services rendered. This situation may be challenging to stay in business. 

The best way to solve the problem is to sell the invoice to a factoring company that releases funds immediately, reducing your risk of a fund crunch.

A start-up trucking firm can have a lot of business deals but not enough capital to support it because customers pay in 30-90 days. The company has to pay expenses on fuel, salaries, maintenance, taxes, etc., on time. 

That’s where a factoring company comes in with a financing solution. It provides money to the firm based on the number of invoices. Banks may consider this kind of document not suitable for a loan. In contrast, a freight factoring company considers the invoices as an asset worth purchasing to recover money from the customer. Factoring helps small and mid-sized businesses manage their receivables and cash flow.

Factoring companies must fulfill some criteria to remain in business with better reliability and sustainability. These are as follows:

• How fast you will get paid, and under what circumstances.
• What percentage of the invoice value will the firm get in advance?
• Types of factoring offered.
• What is the service charge or commission fee deducted from the total amount?
• Any processing, administrative, or setup fee is applicable.
• Early termination conditions of the contract.

Benefits of Freight Factoring

Freight factoring provides ample benefits to truck companies by allowing cash advances. The truckers need not wait on customer payments to fund the business. It facilitates avoiding long payment cycles, maintaining the flow of capital, and accelerating business growth. The benefits achieved by truck companies are as follows:

Timely Payment to Drivers

Late customer payments cause delays in payment to drivers, which may affect productivity and employee satisfaction. Factoring improves the cash flow, allowing you to meet payroll obligations on time.

Complete New Orders

You don’t have to wait for customer payments and can spend the money received from factoring in fuel, equipment maintenance, and other transportation necessities to execute new orders. The faster fund flow makes you confident to accept new orders and expand your customer base.

Manage Operating Expenses

Freight factoring allows trucking companies to access working capital, so they don’t have to cut into their savings, sacrifice equity, or sell assets to pay essential operating expenses.

Expand the Business

It enables you to turn unpaid invoices into money much faster, giving you the required funding and flexibility to grow your team, increase your assets, and expand your business.

Improve Credit

Freight factoring is not a loan, so you do not have to worry about repaying. Instead, you can focus on improving your company’s financial position by utilizing the working capital received from factoring. It would be easier to pay the debts and make your business more efficient and productive. 

Matrack Solutions

Matrack truck factoring system facilitates trucking businesses by exchanging unpaid invoices for cash. It allows truckers to resist the financial blow of late customer payments. Factoring allows money whenever the trucking company needs funds for operations and business growth without depending on customer payments.

Here is an overview of how freight factoring works with Matrack:

• It accepts all kinds of unpaid invoices from creditworthy large or medium-sized companies.
• It generally offers a factoring advance at 95% of the invoice value and a cash advance deposit between 24 and 48 hours after submission.
• It processes customer payments and report collection progress through an online customer portal.
• The team can communicate with customers to professionally resolve any issues, ensuring that business relationships are well-maintained.
• After collecting the invoice payments, it deducts the factoring fee before sending the rest of the invoice value to the borrowing company.

The Crucial Factors For Starting a Factoring Company

The factoring business exists to solve the fund problem faced by trucking companies by providing finances to keep their business running and growing efficiently. The company charges a fee depending on the invoice value in exchange for faster payment which varies from low to higher percentage. 

So, you will always receive a lesser amount than mentioned in the invoice. The loss is not substantial if you consider other business-related costs to cover. You will not be held liable for repaying the invoice even if the customer delays or does not pay. It would safeguard your business from the risk of a fund crunch. We will discuss below the parameters for starting a factoring business.

Secure Adequate Fund

Your factoring company will be in the business of providing fund access to other companies. So, the availability of operational cash reserves in your business is crucial. It aids you in supporting customers with the money they require against submitting the invoices. It would improve your reliability and build a trustworthy relationship with trucking companies. 

You can work with a bank for a stronger sense of security and stability as the bank acts as a reliable source of funds. As per industry standards, most factoring companies provide 80% – 90% of the invoice value in advance. You need to pay the balance amount after deducting the operating costs to the firm when the customer pays the obligation.

Set up a Website to Reach Customers

It is necessary to create and develop a website to promote your offer. You must prepare an engaging design and content to reach a wide range of customers. Security of the website is a significant consideration to maintain client information secure and safe. 

You can engage a professional and expert web designer to develop your website with a suitable design, content, and security features. The portal should provide updated information and user-friendly support to the users around the clock. Reliable customer support is essential to gain customers’ confidence and trust, opening up growth opportunities.

Decide on Terms of Factoring

You need to consult an experienced legal professional to draft standard contracts’ terms per your company’s factoring policies. Before starting a factoring business, it is essential to have a clear idea of the types of factoring that prevails in the industry. You must ensure keeping yourself in a strong position to provide reliable support to truckers through timely financing. There are different types of factoring commonly used in the market which are as follows:

• Recourse: In this system, the borrowing firm is liable to recover payment from the customer after getting paid by the finance institution. The service fee charged by the factor is generally less.
• Non-recourse: In this process, the factor is responsible for recovering payment from the customer without involving the firm. It charges a higher service fee from the borrowing firm. 
• Disclosed: The supplier of the goods mentions the name of the factor in the invoice, asking the purchaser to pay the factor.
• Undisclosed: The invoice doesn’t contain the factor’s name, and the factor realizes the debt in favor of the firm.
• Domestic: In this case, the three parties involved in factoring (customer, client, and factor) reside in the same country.
• Export: This system involves four parties: the exporter (client), the importer (customer), the export factor, and the import factor. It is also known as a two-factor system.
• Advance: Factor pays in advance about 80% of the value of the invoice. The firm gets the balance amount after the customer pays the factor of the entire amount.
• Maturity: The factor pays the client only after collecting the accounts receivable or on an agreed payment date.

An experienced legal advisor can assist you in this area and guide you to utilize industry-appropriate contract terms based on the nature of financing the company will provide. 

Study the Borrower and Client Profile

Perform a proper market study and analysis of trucker profiles that would be your prospective clients. This information will help you determine the strategies. The business profile of trucking companies and their customers are a crucial source of information that guides you in assessing the liabilities and challenges you would likely face. 

You can accordingly prepare the contract terms even if it requires some deviation from the standard terms. It is also necessary to check the financial health of the borrowing company and its customers before accepting the invoices for the release of payment. For qualifying a firm for factoring, its financial status and credibility are significant consideration factors. 

Decide On The Charges

You buy the invoices at a discount rate, which means companies selling invoices don’t receive the full value of those invoices. Your company takes a service charge or commission at a certain percentage of the invoice amount. 

The amount of this discount is one of the main factors to consider when starting a factoring business for trucking, as it affects your profitability. You can decide on the discount rate considering a lot of factors which include the following:

• Whether you provide recourse or non-recourse factoring
• The business health of your customers
• The volume of the invoice amount

You may charge a flat fee which means the same percentage fee for every invoice, or a variable rate by charging lower fees on invoices that pay quickly and higher fees on invoices that take more time to pay.

Conclusion

Freight factoring is when the trucking business sells its invoice to a factoring company. The factoring company then pays the carrier or trucking owner-operator the amount of the invoices minus a small percentage. It recovers the payment from the customer later.

In this article, we have discussed how the factoring company provides a reliable solution to truckers by securing faster payment and enabling them to avoid the risk of inadequate fund flow due to late payment by customers. We hope we have provided valuable input on a factoring company’s role and responsibilities in delivering financing support to trucking companies.