Owners of freight businesses fully understand the value of working capital and the consistent cash influx needed just to keep the business up and running while making the daily deliveries. The day-to-day costs, too, aren’t very easy to manage as they include fuel requirements for multiple trucks, daily wages of drivers, maintenance and repairs, and even parking and tolls. All this brings the owners of these companies to weigh the pros and cons to freight invoice factoring in order to make the most lucrative and informed decision for their business.
Thus, we shall now plunge deep into these pros and cons so you can see how freight factoring benefits your business while understanding the drawbacks, too, so you can make the right and best choice for your business.
What is Transportation Invoice Factoring?
The process of transport invoice factoring involves your trucking company collecting its unpaid invoices with a bill of lading (BOL) to act as proof of delivery, then submitting them all to a transport invoice factoring company. The reason behind doing so is to get instant cash, which is almost the same value as the invoice(s) in two installments, where the first constitutes almost 90% of the value of the original invoice, and the second installment is paid when your client completes the invoice payment.
As we know already, instant cash is just what every delivery business needs to keep itself running every day, and with transport invoice factoring, they can easily. This way, the business gets instant cash for the deliveries they complete without having to be burdened by a long-term loan from a financial institution.
Pros of Choosing Invoice Factoring
Whether yours is a small business looking to establish itself, or an established one looking to expand, instant cash through transport invoice factoring is just what you need to keep going, and thus, we shall now understand how you benefit from it:
1. Instant Cash
Being the most obvious reason for businesses to choose factoring, instant cash, as we know, forms the backbone of every freight business, no matter how large or small. Thus, by receiving instant cash, and that too, without getting a loan, you get alternative financing options that do not involve loans or your credit reports.
2. Quick Approval, Unlike For Loans
Newer businesses that might struggle with collateral or credit scores will definitely find it harder and more time-consuming to get approved for a loan. On top of this, some do not even wish to hold the burden of a loan, especially during the early and set-up stages of their businesses, and in this case, one must understand both the pros and cons to freight invoice factoring.
3. Flexibility For Clients
When you have a consistent and reliable cash influx from freight factoring, you can also give your clients some flexibility when it comes to completing the payments for deliveries by allowing them a month’s time or so. Thus, it will take the stress off of them while improving your relationship for a long-term partnership by offering extended payment terms.
4. Limited Risk With Recourse Factoring
If you choose recourse factoring, your business will limit the risk and loss it incurs when a client fails to make the payment they owe you, because with this option, your factoring company will bear the loss. This way, you can keep your business up and running without worrying about paying out of pocket or your assets being seized, as happens in the case of bank loans.
Cons of Working With a Transport Invoice Factoring Company
Weighing both the pros and cons to freight invoice factoring is what will help you come down to a final decision of whether you want to choose a factoring service, and so, here are the possible cons so you can be aware of them:
1. Negative Services In The Past
Back when lenders used to carry out the service of freight factoring, some had been known to take advantage of their clients using jargon, confusing language, and malicious terms, putting business owners at a disadvantage. But like every business, when carried out the right way, with the right partner, they come with countless benefits to your cash influx and working capital.
2. Reduced Profit Margins
Even though the cut taken by your factoring company is as low as 1-3%, you still lose some percentage of your total income, which can affect your monthly or long-term budget or plans. However, these losses can be covered if your factoring service also offers back office services and client management.
3. Hidde Costs From Shady Companies
Some companies refrain from sharing the actual costs and deductions with their clients to keep them in the dark, while making unnecessary deductions in the name of fees and charges. Thus, to avoid this issue, ask your factoring service for a detailed cost breakdown before signing a long-term contract, and clarify all your doubts beforehand, too.
Evaluating The Pros and Cons of Freight Factoring
Understanding all the terms and pros and cons to freight invoice factoring is just what will allow you to take an informed and calculated decision on how the whole process will work for you. Thus, with the right knowledge and understanding of the process and your requirements, making the right call for your business’s finances will seem much like a cake walk.