There are many types of businesses in the United States, and they provide many different services for customers and other businesses alike. One particular business type is freight, where a carrier company lends its trucks or trains to clients for transporting goods. Those clients, the shippers, can pay for the use of such freight vehicles to deliver their goods to and from factories, warehouses, and retailers alike. This business model is based on the carrier charging an invoice to the client shipper, and invoice funding is a major part of how a carrier makes a profit. The problem is that shipping clients do not always pay the invoice on time, and even if they do, it may take several weeks or more for the invoice money to arrive. Many carrier companies, especially smaller ones, simply cannot wait that long to receive those funds. Such companies may be in real trouble if they are kept waiting for their invoice payments, so a solution must be found. This is where freight factoring services come in. What is a factoring company, and how can factoring financing help a carrier? Business factoring services can do a lot of good for carriers, and they can save smaller carriers from ruin. What is there to know?
The main clients of factoring companies are carriers, and there are plenty of them. In the modern American transportation network, some 12 million trucks, rail cars, locomotives, and sea vessels are constantly moving all sorts of goods, especially trucks. Th4e Federal Motor Carrier Safety Administration has estimated that nearly 5.9 million commercial vehicle drivers are at work in the United States today. This is a big and robust business, but carriers may face financial problems if invoices are late. Ordinarily, an invoice may be paid 60-90 days after it is sent, and often, invoices are paid late. And even if these invoices are paid right on time, smaller carriers literally cannot afford to wait. Carriers have expenses such as paying off vehicle purchases, fuel, maintenance, and crew salaries. Late invoices may mean bankruptcy, and unfortunately, many small businesses today, carriers included, face the specter of bankruptcy. But factoring can help. A newcomer to the carrier business may wonder “what is a factoring company, and what does it do?” The question “what is a factoring company” has a simple but vital answer.
What is a Factoring Company
A factoring company can be thought of as as sort of freight broker and money lender. These companies act as a sort of middle man between a carrier company and its client shipper, smoothing out the funds going between them. These factoring companies can address the issue of late invoice payments on the carrier’s behalf, while making a profit in the process.
When a carrier sends an invoice to a client, a factoring client can be hired to step in. In this case, the factoring company will purchase the rights to collect 100% of the invoice’s value on behalf of the carrier. In return, the factoring company will send a large percentage of the invoice’s value, often 70% or so, to the carrier right away. This is vital because the carrier is getting money up front that it cannot afford to wait 60-90 days to receive. With this up-front money, the carrier can afford to cover its expenses while waiting for the client to pay its invoice.
When the client does pay the invoice in full, the factoring company will give another, smaller percentage of the invoice’s value to the carrier client. This, combined with the initial up-front money, may add up to around 90-95% of the invoice’s total value. Meanwhile, the factoring company will keep the remaining percentage to itself, and the invoice’s full value, to itself as a source of profit. In a sense, the carrier sacrifices a small percentage of the invoice’s total value in exchange for getting most of the money up front. Given how time-sensitive this can be, this is often a good deal. Smaller companies may not have deep cash reserves to fall back on while waiting for an invoice, so business factoring can go a long way. Good business credit, one should note, can make it easier to hire a factoring company.