How Logistics Factoring Can Help Your Business
There are many struggles in maintaining a healthy cash flow while running a logistics company.
You need to invest a lot of time and money into your transportation services before you ever see a dime in return.
Unfortunately, you don’t usually get paid upon delivery; you may find yourself waiting months for payment.
What Is Logistics Factoring?
Logistics factoring is a type of invoice factoring service. It allows you to collect the bulk of payment for your logistics services without waiting for your client to pay.
Logistics factoring, freight factoring, and transportation factoring are three names for the same service.
This service is a good option that helps logistics companies maintain a healthy cash flow.
Is your interest piqued?
It should be!
How Does Logistics Factoring Work?
First, the logistics company (that would be you) receives a request for a load of goods from a client.
The logistics company then provides a quote to their client for the total cost of delivering these goods.
If the client wishes to proceed, the logistics company makes plans to deliver the goods.
At this point, you have two options:
You deliver the goods, invoice your client, and wait 30-90 days (or longer) for payment.
Meanwhile, you must continue to operate your company without this income.
Can you pay the bills without this working capital?
If you’re worried, check out Option #2.
Instead of waiting for your client to pay you directly, you sell the freight bill to a logistics factoring company.
After approval, you get the payment within 24 hrs. Your factoring company pays you the bulk of the invoice due.
Your logistics factoring company is then responsible for collecting the payment from your client.
The logistics factoring company will send the remainder of the invoice to you when it is paid in full but keeps a small fee for their services.
The fee rate is dependent on several factors but is usually between 1 and 5% of the total bill.
The Benefits of Logistics Factoring
As you may conclude, there are some pros and cons to using logistics factoring services.
Here is a shortlist of the benefits of opting to use these services:
1. Gives You Access to Working Capital
There’s no denying that the delivery of goods is costly.
It can be difficult to maintain a business while waiting for full payment of services rendered, especially as a startup.
Logistics factoring allows for same-day funding. You’ll wait only a few hours for your investment to return to your account.
This keeps cash flow healthy, allowing you to continue doing business without the worry of your money running dry.
2. Helps You Grow Your Business
With little to no wait on working capital, you can scale your logistics business faster.
You can use your available funds to refuel and maintain your logistics fleet, which allows you to deliver more goods.
Logistics factoring is a dynamic service. The freight factoring company will often provide a discount for companies who factor in a larger volume of clients or invoices.
However, you don’t pay a higher rate if business slows down. As long as you meet your monthly minimum, you still pay the same flat rate.
Best of all, contract approvals are based on the client’s viability, not your credit or business history.
So even if you have little credit or long-term contracts to prove your worth, you still have access to this funding option.
This differs from a line of credit, which takes time and is approved based on your ability to repay the loan.
3. Keeps You Out of Debt
Logistics factoring provides capital to companies without putting them in debt.
Unlike a traditional small business loan, factoring comes with no compounding interest or repayment terms (as long as you work with a non-recourse factoring service like Now).
4. Teaches You About Your Customers
Freight factoring companies run a credit check on your customers as part of their approval process.
This information makes you aware of customers who have a habit of nonpayment.
If your invoice factoring company doesn’t approve a factoring contract with one of your clients, you should take a hard look at their business practices.
This benefit can protect you from difficult or unreliable customers.
5. Frees Up Time
Logistics factoring saves you the time and manpower you would otherwise spend chasing after invoice payments.
You can dedicate this additional time to managing new loads and growing your business.
Some freight factoring companies even offer account management services as an added service.
6. Improves Your Finances (and Reputation)
Using the services of factoring companies keeps your business in better financial health.
Not only will you have an easier time paying your bills on schedule, but other companies might take note of your business management skills and be more willing to work with you.
7. Has No Spending Restrictions
Unlike a fuel advance or a small business loan, which provides funding for a specific use, logistics factoring companies don’t dictate how you use your cash.
You can use it to refuel your fleet, upgrade equipment, cover payroll, or obtain DOT permits to stay in compliance.
What Types of Transportation Companies Can Benefit From Logistics Factoring?
As you might imagine, freight factoring services are popular with companies in the trucking industry.
Trucking companies and owner-operator truck drivers love getting swift payments at a minimal cost.
Other types of companies can benefit from this service, too. Any kind of shippers or transportation services that are a vital part of the supply chain can use factoring to help keep their accounts receivable looking healthy.
Here are some examples:
- Freight brokers
- Air cargo companies
- Rail transportation companies
- Ocean freight companies
- Third-party logistics companies
Is Logistics Factoring Right for Your Business?
When determining if you should use logistic factoring services to improve your company’s cash flow, there are three main questions to ask:
Is It Cost-Effective?
How many unpaid invoices do you have in your accounts receivable? Are you struggling to collect on these freight bills?
Do a large majority of your customers’ accounts have high net terms? Do you often wait months to receive payment on these invoices?
If the answer to these questions is yes, the next thing you need to consider is your volume of business.
You may be able to wait for payment from one or two customers, but waiting for all your customers to pay can bring your business to a standstill.
Hiring a logistics factoring company to collect invoices from a large volume of accounts is well worth the investment.
However, if you only have a handful of customers with small accounts, the cost of invoice factoring might not be worth the return.
Does It Save You Time?
Your accounting department might only have a few employees, or you might even be the entire accounting department.
Consider how much time is wasted sending reminders and making phone calls to customers who owe on their freight bills.
Logistics factoring services save you these administrative hours, so you can put them hours toward other tasks, like securing more customers.
It can also save time you would otherwise spend on cash flow management. With fewer cash flow limitations, you don’t have to be so creative in how you use your working capital.
Does Lack of Cash Flow Limit Your Business?
When a business lacks cash flow, a slew of negative effects begin to spring up.
If your business is facing some of these negative effects, logistics factoring may be what you need to keep your business afloat, even if it’s just a temporary fix.
One thing about logistics factoring services is that they don’t tie you up in a long-term contract. Some factoring programs don’t even require you to meet a monthly minimum volume.
How to Choose a Logistics Factoring Company
There are many invoice factoring companies out there, each with its own terms, rates, and fees.
How can you determine whether a company is the right one for you?
We recommend comparing their reputations, fees, and processes.
When it comes to financing your business, you should only work with reputable companies.
Otherwise, you put your business at risk.
Here are a few ways to tell whether or not a factoring company has a good reputation:
Visit the BBB Website
Your first step should be to look them up on the Better Business Bureau website. They should have a good rating on this site.
Make sure to read through the customer reviews and complaints. Even if they have a good BBB rating, you may see patterns of negative practices that past customers don’t appreciate.
Consider Their Age (and Parent Company)
Look into the factoring company’s age and whether they are a subdivision of another company.
Even If the company is relatively young, it may still be a division of a larger, more established organization.
Ask About Their Customer Service Availability
It’s best if your factoring company offers 24/7 customer service. You want to be able to connect with them when you need them without having to wait.
Invoice factoring companies with subpar customer service can be very difficult to work with.
Of course, the biggest factor in this decision is how much a service costs. When comparing logistics factoring companies, their fees and rates will play a big role.
The total price of services breaks down into three parts:
- Advance rate
- Discount rate
- Additional fees
The advance rate is the amount that a logistics factoring company is willing to pay your company upfront once they approve your invoice for factoring.
This rate can vary greatly among different companies, and it can be natural to sway towards a higher advance rate. However, higher advance rates usually come with a higher discount or factoring rate.
A discount rate is the percentage of your invoice that the logistics factoring company keeps when they collect the remainder of the invoice.
This is how invoice factoring companies make their money.
The lower the discount rate, the more of your money you get to keep.
Lastly, you’ll want to read the fine print or check the FAQ section on the company’s website to learn if they have any hidden fees.
Here are some examples of hidden fees:
- Origination fees
- Service fees
- Renewal fees
- Unused line fees
- Monthly minimum fees
- Credit check fees
- ACH transaction fees
- Wire fees
Each factoring company will also have its own set process. You’ll want to find a company with a process that works for your business.
For instance, how fast do they typically pay for invoices? If the turnaround time is longer than you’d prefer, you may want to look for a different company.
Make sure to ask whether they are a recourse or non-recourse factoring company. Recourse companies hold you responsible if they can’t collect from your client, but non-recourse companies take the financial hit.
As this article has shown, there are significant benefits to working with a logistics factoring service, and these benefits aren’t limited to truckers and shippers.
Any company that plays a role in the supply chain can use logistics factoring to keep its cash flow at a healthy level.
As long as you choose the right company and the right plan, you’ll reap these benefits and then some.
You will have peace of mind knowing that your business isn’t at the mercy of your customers’ timetable, and you don’t have to go into debt to keep your business afloat.