Across the United States, factories and farms are producing the nation’s finished goods and foodstuffs, from wheat to dairy products to hardware, cars, and kids’ toys. But it is not enough for these items to be produced; there must also be a logistical network in place for transportation, warehouses, freight brokering, and more to get these goods to their intended destinations on time. A shipper may produce these goods, but it must hire carrier or transportation companies to get it to the intended warehouses and retailers on time. Most often, this transport is done by means of trucks, and these carrier companies will take on jobs to transport goods for their clients. These carriers will then charge their clients invoices for payment, and often, if on time, payments are made within 60 to 90 days. Smaller carriers simply cannot afford to wait that long, however, since they have their own expenses to deal with, so transportation factoring companies are hired. These freight factoring companies will act as a middle party where finances are concerned, and factoring financing can save a carrier from financial disaster. When is it time for freight invoice factoring, and what deals will these transportation factoring companies offer?
The Work of a Carrier
The typical clients of these transportation factoring companies are carrier companies who have the trucks and similar vehicles necessary to transport goods for their shipper clients. This is a big business; today, some 12 million trucks, rail cars and locomotives, and seagoing vessels are used all over the American transportation network. Trucks make up the bulk of this work, since they are a convenient size and can drive nearly anywhere, unlike a train. The United States today is home to around 28 million small businesses, and some of them are carrier companies that have just a few vehicles in their respective fleets. Such carriers will often make use of freight brokers to match them up with client shippers and arrange a fair deal for transporting goods.
These carriers may have cash flow issues without the help of transportation factoring companies, however. These smaller carriers don’t have deep cash reserves that they can fall back on while they are waiting for invoice payments, and these carriers have their own expenses such as paying off vehicle financing loans, fuel and maintenance, marketing, staff salary, and more. And many invoices are in fact paid late. This may threaten a smaller carrier’s cash flow and may even drive it into bankruptcy if an outside party does not help, so to smooth out cash flow, carriers will turn to transportation factoring companies.
The Work of a Freight Broker Company
A freight broker company is a sort of money lending service for business clients, typically carriers. When a carrier has completed a shipment for its shipper client and charged an invoice, the carrier may turn to transportation factoring companies in their area while the invoice is still outstanding. Should the invoice factoring company agree to a deal, it will purchase all rights to collect 100% of that invoice’s value once the customer pays it. In the meantime, the invoice factoring company will give the carrier client around 70-80% of the invoice’s value up front. The carrier urgently needs money to smooth out its cash flow, and that up-front money is exactly what it needs. This can save a carrier from bankruptcy while waiting for the invoice payment to go through.
Later, when the shipper does pay its invoice, the factoring company will collect 100% of the value, as promised. Now, the invoice factoring company will give another, smaller percentage of the invoice’s value to the carrier client, adding up to around 95-98% of the invoice’s total value. The factoring company will keep the remaining 2-5% of the invoice’s value for itself, which is the source of its profit and acts as the fee for its lending services. This means that the carrier client will sacrifice 2-5% of its invoice value, in exchange for getting most of the money up front so that it can cover its own expenses in a timely manner. This is usually a very good deal, and carriers may have better chances of hiring cooperative factoring companies if they have good business credit scores (which are distinct from personal credit scores).