Small businesses can use factoring to help them manage their cash flow. Rather than thinking about funds to pay for operational expenses, they can dedicate their time to hauling their next load. Also, instead of chasing a late payer down, they can focus on their upcoming projects.
Undoubtedly, freight factoring can help a business function and grow by leaps and bounds. Further, it works with a trucking company by selling its unpaid invoices to a factoring firm. Then later, for a small percentage, offers cash advance to the trucking company. Such a fee would typically range between 3-10% of the total receivables. The factor will then be the one to collect payment for the unpaid invoice.
Benefits of Factoring
Two of the significant benefits of factoring experienced by owner-operators and small carriers are less time chasing down past due accounts and more time driving more revenue to the business. While such benefits offered by the factoring company come with a fee, the amount is negligible compared to the weight lifted off your company’s back.
Signing up with a specific factor would require you to go through simple application steps. These steps often include setting up a separate and new bank account, assigning unpaid invoices, and agreeing to the company’s terms of service. If you are not aware of how factoring works, you can get yourself and your business in big trouble. To avoid falling into these loopholes, consider these common factoring mistakes:
Not thoroughly reading the contract fine print
When you engage the services of a freight factoring firm, you are essentially entering into a contract. The terms governing the enforceability of such service are written in the contract or agreement. As a party to the said agreement, you have the obligation of reading all the contents of the documents before signing it. Even if you would contest later on that it is a contract of adhesion, you will still be held liable for not observing the required degree of diligence expected of a person entering into a contract.
So, to fully understand what you are getting yourself into, make it a habit to read the fine print. Take careful notice of the factoring fee, delivery of payment excess, and the rate of the cash advance.
Failing to pay the factoring firm
It is a common mistake among new trucking companies. If you apply for a factoring agreement, your client should send the payment directly to the factoring firm. However, there are times that your client will send payment to you instead of the factoring firm. Remember that this is not your money anymore. You already sold the invoice to the factor. The right thing to do is to communicate with your client and the factoring firm to ensure that the rightful recipient receives the payment.
Non-vetting the factoring firm
As mentioned above, the rate of factoring fees would range from 3-10%. There are even factoring companies that charge a 20% factoring fee. The cost of the factoring fee will depend on various factors. However, you can do yourself a favour by vetting the freight factoring firm yourself. Check their reputation. Research on how quickly they disburse payments. Also, it is essential to know if you can reach them in the event that you run into factoring-related issues. You can check the Better Business Bureau or the web for pertinent information.
Conclusion
Invoice factoring is an excellent solution for owner-operators and small carriers. There is no doubt about that. Then again, as a party to the factoring agreement, you must also know what you are getting yourself into. Read what you need to read before you sign it. Do your research, and observe good faith in all your dealings. With these lessons in hand, you can protect your rights, and you can also remain ethical in your dealings with your chosen factoring partner.
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