How to Fund your Freight Bills Using Factoring

Most new and growing transportation companies have one thing in common - cash flow problems. Unless they have a quick pay set up with their clients, most freight shippers and carriers can expect their bills to be paid in 30 to 45 days. This can be a problem for many because they have to bear the costs of delivering the freight and then carry all the company expenses while waiting to get paid. The company needs to have a substantial cash cushion to be able to absorb all the costs - or risk delaying important payments.

One way to solve this problem is to cover the time gap with business financing. The challenge with conventional business financing is that it's very difficult to obtain, especially in today's environment. Most lending institutions will scrutinize every detail of the company before making a business loan. This means that to qualify, your business will need to have at least two years of positive financial statements, strong assets and owners with a solid background. Startups and small freight companies will have a tough time meeting these requirements.

There is an alternative solution to this problem though. You could factor your freight bills. This eliminates the anxiety of waiting for your customers to pay. It can provide predictable cash flow ensuring you have funds to pay for drivers, fuel and repairs. And as opposed to most conventional financing, freight bill factoring is relatively easy to obtain.

Freight factoring offers a fairly simple proposition. A factoring company provides you with an advance for your freight bills. They hold them as collateral while waiting for the customer to pay. Once the freight bill is paid, the transaction is settled. Usually, factoring companies advance about 90% of the freight bill once the load is delivered. You get immediate funds. The remaining 10%, less the factoring fee, once the customers pays the bill in full.

The transaction flow usually works as follows:

1. You send the freight bills and documentation to the factoring company
2. The factoring company advances 90% of the invoice and deposits it in your account
3. The factoring company verifies the invoices mails the freight bills to your client for payment
4. Your client pays the invoice in full. You receive the settlement of 10% less the factoring fee

There are two key areas where factoring differs from other types of financing. First, the factoring company verifies the invoices to ensure they are accurate (step #3). This is a critical step since the invoice is the collateral for the transaction and it must be verified before funding. Second, the client usually sends the payment for the freight bill to the factoring company, on behalf of the client, rather than to the client directly (step 4). This enables the factoring company to then settle the transaction and close it. Freight factoring is relatively common in the transportation industry and most shippers understand the need for factoring and are comfortable working with these procedures.

Another important difference between factoring and conventional financing is how collateral is evaluated. In a factoring transaction, the freight bill is the collateral in the transaction. Factoring companies will look at the credit of your customers very closely to determine eligibility and invoice quality. Only those bills coming from credit worthy customers can be financed. The advantage of this, is that a transportation company can use their customers credit to their own advantage. A small freight carrier or broker with a solid roster of customers that may not be able to get a business loan but will usually have a good chance of obtaining factoring.