Every business needs a healthy cash flow for smooth operations. If you operate a freight or trucking company, you may need access to funds regularly to ensure efficiency on your end and meet other obligations. Having access to funds while awaiting your customers to honor your invoices can help boost your cash flow needs.
As a service offered by factoring companies, freight factoring gives you immediate access to funds for invoices before their due dates. Thus, you don’t have to wait for the usual 30 or 60-day period to receive payments. Although you could rely on bank loans previously, the loan interest would increase your expenses and put your company in debt, thus reducing your profit margins. You can avoid this with freight factoring companies while maintaining a clean balance sheet. Yet a factoring company may need to collect recourse from you at times, but the chances of this happening are few if you have a credible customer base.
You can opt for freight factoring as a freight company whenever you need it. Here are some pros and cons of freight factoring to help your decision.
Pros Of Freight Factoring
1. You Aren’t Creating A Debt For Your Business
For bank loans, you’re taking in a debt that accumulates or grows over time. If you default, it can harm your business credit score while sinking it into more debt. For freight factoring, though, you aren’t borrowing money but getting an advance payment regarding a job already done. You’ll only need to cover factoring costs, which can be negligible considering your fast access to your invoice funds.
Thus, you’re using your money when you take on freight factoring to finance your business. The only difference is that the payment isn’t directly from the customer but instead advanced by a third party to support the invoice to the customer. Even with the factoring costs, it can be better than the long-term liability of a bank loan.
2. It’s Flexible And Available To All Business Sizes
When you partner with a flexible factoring company, you can determine the number of invoices you would like to factor. This flexibility enables you to choose your factoring needs depending on your cash flow status. For example, if you have one or two customers who pay invoices immediately, then you won’t need to factor those invoices. Additionally, you can determine how frequently you want to factor, so you won’t often enter into long-term contracts.
Freight factoring is also available to businesses of all sizes. Thus, whether you’re a small start-up or operating a large fleet, you can access factoring financing when you need it. This can be beneficial if you’re looking at having steady business growth with a good cash flow.
3. You Can Benefit From Other Non-Cash Services
While in business, you have to follow up on back-office duties such as credit checks on customers and cash collection. These responsibilities can take considerable amounts of time. Freight factoring companies can take this load off your desk and allow you to focus on quality service delivery. Thus, your account payables and receivables workload are reduced substantially.
Other services you can gain from freight factoring include fuel card programs, fuel advances, and fuel discount cards. Fuel is your main expense as a trucking company, and accessing such benefits can help you save significantly. Moreover, the discounts from the fuel cards can help you offset factoring costs, resulting in a win-win situation for your business.
Cons Of Freight Factoring
1. You Depend On Your Customers’ Creditworthiness
Freight factoring companies would mainly purchase up to 90-day invoices. However, if some of your customers fail to pay before then, the factoring company will need you to buy back the invoices. This can set you back cash-wise and limit your cash flow. Unless you have entered into a non-recourse contract, such bad debts can still cost you.
2. Less Customer Interaction
You leave the payment collection to the factoring company when entering into a factoring agreement. Thus, most cash collection-related communication will be between the customer and the factoring company. You may not control this communication and it would only reduce your interaction with your customers. Furthermore, the treatment from the factoring company can affect your customer relationships and risk your reputation.
3. Less Financial Privacy
To access factoring services, the factoring company would need various financial information from you. This can include bank accounts and customer information. Even though sharing such financial details would be crucial to your business’s balance sheet health, some customers may not feel comfortable with it. This can create tension between your customers and the business, affecting your reputation.
Conclusion
With good cash flow as an essential operational factor in every business, freight factoring lets you keep your business from sinking into debt from bank loans. With the pros and cons discussed here, you can adequately weigh your options regarding freight factoring.
Author’s Bio: Darvey Stevens is a business and digital technology analyst. He consults and shares his expertise on business and has been doing this for over five years. During his free time, Dan enjoys a game of soccer, plays digital games, and follows motorsport.