HOW FACTORING WORKS
Heard of freight factoring companies before but don’t know if it is for you? We are going to dive in and explore just what freight factoring services are and how they can benefit your trucking company. Most people compare invoice factoring companies by the factoring rate because that would seem to be the easiest point to understand. If you factor a $1,000 invoice and the factoring rate is 1.5% then you should receive $985, right? It sounds like a pretty good deal, but this is not always the case. Low rates, other fees, minimums and volume requirements are usually used by factoring companies to recoup those costs. Before you know it, you could actually be paying 5%, 6% or 7% each time you factor. The best way to avoid this situation is to be informed. TAFS will go through the factoring agreement with you so you understand the terms. Make sure you hold any companies you speak with to those same standards.
TAFS is a factoring company that provides owner-operators accounts receivable financing, a.k.a. factoring. Factoring has become extremely common in the trucking business and is when your company’s accounts receivable are converted into cash by selling the freight bill of lading or outstanding invoices to us, the factor. Rather than waiting for your customers (the shipper or freight brokers) to remit payments based on 30, 60, or 90-day terms, we quickly advance a percentage of the invoice to your business. This steady cash flow is vital for small businesses and allows working capital to fund your critical expenses such as payroll, fuel, insurance, and maintenance. TAFS is also able to offer same day funding and even get you your money in as little as one hour using our factoring program.
Those in the trucking industry have more than likely at least heard of the term “freight factoring” or “truck factoring” by now. It tends to get thrown around quite a bit these days and has gained a name for itself in the industry over the past several years. However, even those who have heard of the term factoring, many drivers and business owners still do not understand precisely what it is, or how it all works. This is especially true to those who are new to the world of trucking in general, let alone specifically that of trucking factoring.
Previously, many were forced to float debts and rely heavily on traditional banks for loans to cover their business expenses until they received payment for the loads they ran. Traditional banks, however, are not solely focused on the trucking industry therefore rarely have plans that truly benefit the needs of truckers. Worse than this many would even turn to credit cards to cover them in these uncertain in between periods.
Let’s Look at an Example
John Doe is a victim of the upfront teaser rate. He signed up with ABC Factoring after they promised him a 1.5% factoring rate. It sounded too good to be true and John Doe did not want to pass up the supposed opportunity. But things took a turn for the worse after John Doe sent ABC Factoring the first invoice.
John’s invoice was for $1,000. With a 1.5% rate, he expected the factoring company to pay him $985. But John didn’t plan on the $25 rush fee, the $5 invoice submission fee, and the $15 invoice processing fee. The 1.5% rate quickly jumped to 6%. Do not forget the $300 setup fee. Now John Doe is only receiving $640 for his $1,000. And it doesn’t stop there. John also pays a $100 monthly membership fee just to be able to send invoices to ABC Factoring. Even if John submits 10 invoices a month, he’s still paying an extra $10 per invoice. John’s rate is now a MINIMUM 7% per invoice just to factor with ABC Factoring. PLUS if John’s customer doesn’t pay ABC Factoring for an invoice within 30 days, John will be charged an aging fee. John is constantly hustling to stay afloat all because he only looked at the 1.5% teaser rate, and not the additional fees.
Don’t be like John Doe: Ask Questions
Don’t be like John Doe: Ask Questions. Arm yourself with the right questions to ensure you are receiving the best deal. Before you choose a factoring company, make sure you get answers about their fee structure:
- Are there setup or application fees?
- Do they charge an invoice processing fee?
- Under what circumstances do they recourse?
- If your customer is late paying an invoice, what are the late fees?
- Are there any monthly fees?
- Is there a monthly minimum volume commitment?
- Are the rates adjustable based on other factors?
Do not hesitate to ask questions. The more questions you ask, the better understanding you will have of a company’s factoring practices. If a company skirts questions or flat out refuses to answer, you probably do not want to trust them with your business. Getting blindsided by fees can be devastating. Make sure you are doing business with a factoring company with a transparent policy.
Why Choose TAFS Factoring Services?
For one, TAFS knows the trucking industry first hand and came into being out of seeing the need for a new approach to factoring services in trucking. We understand the needs of trucking companies as well as the expectations of the industry and we use that knowledge to provide our clients with a unique and understanding approach to factoring. There are a lot of factoring companies out there these days but TAFS proudly stands out from the rest through this level of understanding of just what truckers are dealing with and the services they need to succeed. TAFS has a strong line up of benefits and strategic partnerships geared towards our client’s success. While other businesses have entire office staff working hard to push the company forward, for many trucking companies all that pressure and responsibility falls on the guy driving the truck; It doesn’t have to though. Through strategic partners like TAFS, you can set yourself up for success while taking a fair amount of the burden off of your shoulders.
Recourse Freight Factoring
Recourse Factoring is when a company sells it invoices to a factor, with the understanding that the company will buy back any uncollected invoices. The majority of factors in the industry are recourse factors to avoid the high risk of unpaid accounts.
This practice offers less risk to the lender, therefore, allowing a much more affordable factoring option for the client.
Non-Recourse Freight Factoring
If a factoring company claims to be non-recourse, meaning they want you to believe they will not collect from you if your customer does not pay the factoring company back, they are misleading you. This is actually only true if the customer files for bankruptcy during the time in which you submitted the invoice until they are supposed to pay the factoring company. This happens very rarely. All factoring companies will recourse you if your customer simply does not pay or pays late, it is just a matter of when they will collect from you. Remember, factoring companies are not in the business of giving away free money. All factoring companies have language in the contract to make sure it can collect from you if your customers fail to pay in a timely fashion.
By definition, non-recourse factoring will not hold you accountable for an invoice if your customer defaults on the payment. However, this not the case, and comes at a price. Most non-recourse factors only protect you when your client defaults on an invoice in certain situations – generally, only when the customer has declared bankruptcy. They will actually recourse you in many situations, but call themselves non-recourse because they don’t recourse when a certain situation happens, which is a very rare occurrence. These factors generally have higher fees/rates, taking more upfront from your invoices. They also may limit who you can do business with or limit how often you do business with the same customer in order to protect themselves from defaulted payments. Watch out!
The bottom line is that all transportation factoring companies recourse in some way. TAFS does not believe in offering smoke and mirrors to clients to gain a quick buck on the front end. For a factoring company to be successful in the long run, the clients need to be successful as well. The best way to know what you are really getting into is to ask a factoring company directly “in what circumstances do you recourse or hold money?”. Then, thoroughly read the agreement to verify if what they said is true. If you have questions on some of this tricky contract language, TAFS experts are here to help.
WHY BUSINESSES FACTOR
There are many different types of factoring programs and choosing the correct one for your business is an important decision.
Conventional borrowing is difficult to secure, especially for new or rapidly expanding businesses. Factoring does not create debt or require additional collateral and can generate cash flow quickly. With the TAFS App, clients can get their advance within 1 hour of submitting an invoice. With a traditional loan you will wait a lot longer for your money. Why wait when you can get paid today? Call us today to get started! (913)393-6110
Speed up cash flow.
An alternative to restrictive bank financing.
Eliminate the need for back-end office personnel.
Reduce debt on your balance sheet.