Whenever you need to improve your cash flow and provide working capital for your trucking business, factoring is a viable option. For example, recourse factoring and non-recourse factoring are both efficient ways for a company to sell its invoices to a third party and receive immediate cash.
However, there are some slight differences and other key considerations to remember when navigating factoring agreements. Here is what all trucking entrepreneurs should consider regarding factoring.
Recourse and Non-Recourse Factoring
All trucking entrepreneurs will need to consider whether they should pursue recourse or non-recourse factoring. The process is quicker and less expensive with recourse factoring. However, the trucking entrepreneur takes a risk; namely, if the truck company’s customers fail to pay their invoices, the trucking entrepreneur can be held liable.
Non-recourse factoring is a slightly more complex and expensive process, but it absolves the entrepreneur from liability if their customers fail to pay. Although both options have pros and cons, they should be carefully analyzed before making a decision.
Factoring Rates and Fees
Factoring agreements have various rates and fees. Some of the most common fees that trucking entrepreneurs may encounter include:
- Discount rate (a percentage that will be deducted from the value of the invoice)
- Application fees
- Credit check fees
- Wire transfer fees
These rates and fees can usually be negotiated. Entrepreneurs should compare the available offers and see if they align with their trucking business’s financial goals.
Contractual Terms and Obligations
Each factoring agreement also has individual terms and obligations. Trucking entrepreneurs who want to ensure favorable terms, flexibility for growth, and readiness for changing circumstances should pay particular attention to the following:
- The length of the contract
- Termination clauses
- Minimum volume requirements
Creditworthiness and Customer Approval
Determining your customer’s creditworthiness is among the most critical roles of a factoring agreement. The factoring company will perform a credit check to determine the risk of purchasing your company’s invoices, which will influence negotiations and fees. Make sure that your customer base aligns with the approval process, as companies have different restrictions or limitations regarding certain types of customers.
Customer Relationships and Notifications
A factoring agreement can impact the relationship with your customers. Learn if the factoring company will notify your customers of the financing arrangement. Maintain open communication with your customers and inform them of the changes to foster strong relationships.
Customer Service and Support
Each factoring company can provide different customer service and support options, which can impact your business. Analyze their expertise in the trucking industry and see if they understand the unique challenges. Also, gauge their customer service availability and responsiveness.
Contractual Flexibility and Exit Strategies
Each factoring agreement has termination or modifying requirements. Understand your contractual obligations and whether a termination comes with excessive penalties. You don’t want to be stuck with a disadvantageous collaboration, especially if you want to consider other financing options later.
