There are many types of companies found across the United States, a few of them huge, many of them small. Some are manufacturers or provide services such as cleaning or paving streets. Others, meanwhile, are responsible for transporting freight of all kinds across the United States, and those companies are known as carriers or freight companies. They make use of the 12 million trucks, locomotives, and sea vessels to transport everything from grain to cars to clothing. These companies do business when client shippers hire them to transport their goods to and from factories, warehouses, and retailers, and carriers will send an invoice to the shippers. These invoices are promises of repayment, but the issue here is that invoices take time. Even if an invoice is paid right on time, a carrier or freight company may have to wait 60-90 days to receive it, and invoices are often paid late. In the case of the many smaller American freight companies, this could spell disaster. Small freight companies have expenses, and they won’t have deep cash reserves to fall back on while waiting weeks for an invoice payment to arrive. This is where freight bill factoring comes in. Just what is freight bill factoring, and how can a factoring financing company save a client from bankruptcy?
Carriers and Factoring
Carrier companies have expenses to deal with whether or not they are getting their invoices on time. Carriers may have to pay off purchases trucks of train cars, and they also have to pay their staff and also cover maintenance and fuel costs, plus any other expenses and overhead. This can put a lot of pressure on carriers, especially if their invoices are coming in late and they don’t have cash reserves to live off of in the meantime. This is when a client carrier company turns to business factoring services for help. Commercial factoring companies will work with clients that have good business credit and make a mutually beneficial partnership. How does freight bill factoring work?
Once a carrier has provided freight delivery services for a client and sends an invoice, that carrier may reach out to freight capital factoring companies for assistance. The factoring company will assume the right to collect 100% of the invoice on the carrier’s behalf. In exchange, the next step of freight bill factoring involves the factoring company sending a large advance of the invoice to the client carrier. This may often be 70-80% of the invoice’s total, and the main attraction to this is the speed of receiving funds. As mentioned earlier, smaller freight companies literally cannot afford to wait weeks or months for an invoice’s money to finally arrive. So, this up front payment in freight bill factoring allows the client carrier to handle its various expenses right away. Fuel, maintenance, crew salaries, and more can be covered with this generous advance that the factoring company will send. In a sense, this is a loan for the client company.
Once the customer does send the invoice, the factoring company will receive 100% of its value. As soon as the money arrives, the factoring company will give another, smaller percentage of the invoice’s value to the client carrier. At this point, the carrier will have received 95-98% of the invoice’s total value (it may vary), and the factoring company keeps the rest for itself. In this way, the factoring company makes a profit by getting 100% of the invoice and a few percentage points beyond that. Factoring companies are most interested in working with client carriers who have good business credit (which is separate from personal credit), so business with good credit may find many factoring companies ready and willing to help out.
What the carrier gets out of this is the promptness of their invoice value. The carrier will sacrifice 2-5% of the invoice’s total value in exchange for the immediacy of the invoice’s remaining value, and in most cases, this is a very good deal. A carrier manager who handles this well can easily give up that extra money for the benefit of covering business expenses right away. Smaller carriers, especially, may need this when they have pressing expenses and no cash reserves on hand.