Nearly a trillion dollars pass through the trucking industry each year. Despite this, though, that money moves slowly. It takes an average of about 40 days for a bill for freight to be completely paid.
For a trucking company, though, that kind of lag time can hurt operations. How, then, can a company keep a stable cash flow?
That’s where a factoring company for trucking comes in. A factoring company lets companies receive money on the spot, instead of waiting 30, 60, or even 90 days for an invoice to be fulfilled.
Keep reading and we’ll tell you about the role of factoring companies, why they do what they do, and how trucking companies benefit from their presence.
How Does a Factoring Company for Trucking Work?
Factoring companies shoulder the burden of the long lag in payment time in the industry. They serve as a mediator for the partnership between a business and its clients. All industries can use factoring companies, but some specialize in freight and the uniquely long invoice cycles make it a good candidate.
When a trucking company uses a factoring company, the trucking company gets paid as soon as it finishes the job. The factoring company pays the trucking company most, though not all, of what it would expect to get from the broker. The factoring company takes the waiting time issues on itself and receives its money from the broker later.
Even the largest trucking companies make use of factoring companies. The immediacy of payment makes them an attractive option.
What if the Broker Fails?
Sometimes, a company will go bankrupt between the time the trucking company sends them a shipment and the time they would pay the broker. The broker then usually fails to pay the factoring company. What happens next depends on whether the company operates on a recourse or non-recourse basis.
Recourse means the default by the bankrupt company becomes the trucking company’s problem. The factoring company will approach the trucking company expecting to be repaid.
Non-recourse, meanwhile, means the default remains the factoring company’s problem. The factoring company has to try to collect from the bankrupt company.
Note that this only applies to cases where the broker fails to pay due to bankruptcy or business closure. The factoring company can still approach the trucking company for repayment if the broker refuses to pay for some other reason.
How Much Does the Trucking Company Pay?
Factoring companies usually charge a rate of five percent or less of what the trucking company would invoice. The specifics of this rate depend on the creditworthiness of both participating companies, the size of the invoice, and other factors.
The process operates similarly to a loan or credit card. The more risk the factoring company takes on, the more it charges.
A Mutually Beneficial Relationship
Trucking companies get a steady income stream, factoring companies make money, and brokers get the comfort of their longer invoicing time. Everyone wins in the relationship.
Did you come here looking for a logistics partner, rather than a factoring company for trucking? Need someone to handle your logistics needs and questions? Get in contact with us today.