Companies large and small need an influx of financing from time to time. While there are several funding approaches to consider, invoice factoring is one that’s often overlooked. If you are not familiar with this approach to financing, here are a few basics you should keep in mind. This funding solution may be just what you need.
What is Freight and Trucking Invoice Factoring?
Invoice factoring is a funding solution that allows the business to make use of an asset they already control: their current batch of open Receivables. Rather than waiting for customers to remit payments on those open invoices, the factoring partner advances most of the value to the company. In a very real sense, the partner buys the invoices with the intent to eventually pay the full value, minus a small percentage that the partner retains as the fee for services rendered.
How Does Freight and Trucking Invoice Factoring Work?
You prepare and submit a batch of invoices to the partner for consideration. That may be a weekly, biweekly, or monthly batch. The partner reviews the batches and may exclude any invoices that are to customers who tend to pay well outside typical terms. Once the batch of invoices is approved, the partner remits a lump sum payment that may amount to anywhere between 70% and 90% of the batch’s value.
As part of the arrangement, you change the remittance address on your invoices to one that is controlled by the partner. As your customers send in payments, they are applied to your account. Once the lump sum amount is exceeded, the partner releases additional funds to your company. When it’s all said and done, the factoring partner keeps anywhere from 3% to 7% as the fee for providing the funding.
The terms of the business relationship are detailed in what is usually called the factoring agreement. It spells out the responsibilities of each party, including the percentage the factoring partner will release upon acceptance of the batch, how additional funds are released, and the percentage that the partner retains. Your business volume will impact the amount of funding you can receive. Depending on the revenue volume and the typical pattern of aging, you may be able to receive anywhere from $20,000 to $20,000,000 in a single batch.
Why Factor Invoices?
Factoring allows your company to make use of the cash flow sooner rather than later. There are no restrictions on how you use the advanced funds. Many companies that routinely factor invoices will use the money to pay creditors well before due dates. This ensures the company does not incur any late fees or charges.
It also helps to protect the company’s credit rating. This is especially important if your business has gone through a difficult financial period and is currently working to repair a damaged credit rating.
It’s not unusual for a company that uses factoring to set aside enough funds to manage the company payroll for the upcoming month. The remaining funds can be used for research and development, upcoming company projects, or to take advantage of any type of growth opportunity.
How is Freight and Trucking Invoice Factoring Different From Other Funding Methods?
Factoring partners review applicants quickly. You will know if you are approved or rejected in a matter of days. Compare that to seeking business loans or lines of credit that could require weeks or even months to receive an approval or a rejection.
You also don’t create additional debt. Unlike bank loans, lines of credit, or receiving funds from angel investors, you don’t have to worry about making periodic payments. Your customers are actually doing that for you every time they remit payments for outstanding invoices.
Your funding partner is less interested in many of the factors that traditional lenders look at closely. The partner is more concerned with the cash flow from your Receivables, how many customers pay in 30 days or less, and what sort of aging over 60 days you tend to experience. Be prepared to provide financial data covering the last six months to a year prior to the application date. This allows the funding partner to get a good idea of how your cash flow is affected by seasonality.
Invoice factoring is also a viable funding approach for a company that is recovering from recent financial difficulty. Perhaps the difficulty was due to the economy, a hostile takeover attempt, or a temporary reduction in revenue as the business made changes to a product line. When financing through a bank or similar institution would be difficult or maybe impossible, factoring companies are often willing to extend financing. This helps you improve the company’s financial footing without adding more debt.
How Quickly Will the Partner Provide the Funding?
Once you get into the cycle of submitting batches of invoices, expect them to be reviewed the same business day or the following day at the latest. The funds are then electronically deposited into the company account of your choice. The entire process usually takes around 24 hours.
Subsequent disbursements as your customers pay their invoices are managed in one of two ways. Some factoring partners will send electronic deposits to your account once a week, reflecting anything collected since the last disbursement. Others provide an online interface you can access and see if there are any funds cleared for release. With the latter, you would request the release. That is also typically processed within 24 hours.
Factoring and Collections Procedures
Be aware that your factoring partner typically takes control of the collections process. If a customer does not pay within the agreed upon terms, the partner will send reminders or possibly make collection calls. It’s to your advantage to learn all you can about those collection procedures, including the verbiage used to communicate with your customers.
Keep in mind that if your partner is unable to collect on an invoice, two things are likely to happen. The value of that invoice will be deducted from the next advance or any funds that are pending release. The partner is also unlikely to factor invoices for that particular customer again.
Ending Your Factoring Arrangement
You can’t just walk away from a factoring agreement. In order to bring it to an end, you will need to notify your partner in advance and arrange to pay for any invoices that are still outstanding. The partner will also work with you to notify clients that all future payments should be remitted to the address that you will provide.
Depending on the partner’s policies and procedures, your factoring agreement may be on a month-to-month basis, a quarterly or semi-annual basis, or be open ended so it continues until one of the partners wishes to end it. Make sure you know what sort of term limit applies, so you can prepare for ending the arrangement responsibly.
Invoice factoring is a great solution for companies of any size. While this approach has a reputation for focusing on businesses that have undergone some sort of financial hardship, even a business with excellent credit can utilize factoring. Take a good look at your present circumstances and talk with a factoring professional. You may find this solution is exactly what your company needs.