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Even in good times, invoice factoring can be an answer

Carriers can wait for weeks or even months to be paid for their services, creating a cash flow issue for many. That's why many smaller companies turn to factoring companies. (Photo: Shutterstock)

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Times are good in trucking right now, and that is something nearly everyone agrees on. Rates are high, capacity is tight and large and small carriers and owner-operators alike are sitting in the driver’ seat, pun intended. With too few trucks competing for freight, even the owner-operator now has a choice as to whether to take that load or not. Brokers are feeling the pressure as well, trying to secure capacity for their shipper clients at reasonable rates.

But, despite all this good news, an underlying problem remains for the truckers – getting paid. Saavy shippers and brokers are paying invoices faster than ever today, hoping to maintain a good relationship with that trucker, who has that precious commodity all want: capacity. There are still some shippers, though, that are dragging their feet when it comes to settling their bills, and that leaves carriers short of cash. Because of this, many consider invoice factoring.

Yes, even in good times, the choice to factor invoices can be a prudent move to ensure consistent cash flow.

Invoice factoring is the selling of an invoice to a company that agrees to pay the seller a percentage of the invoice upfront (oftentimes somewhere between 80% and 90%) and the remainder upon full payment of the invoice, minus fees.

Triumph Business Capital is a company that specializes in factoring for trucking companies and brokers. It offers TriumphPay, which is a paperless system that integrates with a company’s TMS and/or accounting systems.

Triumph provides an example of how factoring works. It cautions that each factoring company is different and there are various fees that some charge as well, which can increase the cost to factor. For that reason, it’s advisable to understand the contract.

According to Triumph, a $3,000 maximum factor with a 95% advance rate over 90 days would pay 90% of the bill to the carrier within 24 hours and the remaining 5% after 90 days without standard factoring fees.

The advantage to a carrier is they get 90% of their accounts receivable almost immediately instead of waiting for 30, 60 or 90 days – or even longer, and once the bill is paid, they get the majority of the remainder (subtracting the fees, of course).

Triumph says that closing fees, monthly and termination fees, discount fees, and factoring fees are all types of fees you may see in a factoring contract. Some companies, it says, also will require you to factor a percentage of your accounts receivable each month and failure to do so can result in additional fees or penalties.

So it’s important to read the fine print.

There are also two types of factoring you must be aware of – recourse versus non-recourse factoring. Non-recourse factoring is when the factoring company assumes the risk for accounts receivable, but it comes with some additional fees to cover the risk.

Unlike taking on a loan to provide ongoing operational cash, factoring is an attractive alternative for many. There is no risk of defaulting due to non-payment, it provides a steady stream of cash, and there are no restrictions on how the money can be used.

Like most business arrangements, choosing the right factoring company is critical, and it is sometimes the hidden fees that add up. So choose wisely.

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