For your trucking business to succeed, it is imperative that you have a regular cash flow that can take care of recurring expenses such as fuel expenses, drivers' wages, etc. If most of your clients pay you after 30 or 60 days, then you could find your cash flow getting clogged from time-to-time. This could interrupt the smooth functioning of your business and always keep you on the edge.



While a bank loan could help you out on a temporary basis, you would need to pay back your loan along with interest in the form of monthly installments. This could put an additional burden on your finances and your mind. Another method of finance that is not only flexible, but also does not require repayment through monthly installments is freight factoring. In this method, a freight factoring company will 'buy' your credit invoices from you and pay you the invoice amount within 24 to 48 hours, instead of the normal 30 to 60 days credit that you might have extended to your clients. The factoring company will deduct a factoring fee of around 1.5% to 5% from the invoice amount as their fees for their services rendered.

The factoring fees will depend on a number of factors. The first factor is the credibility of your client as researched and defined by your factoring company. Thus, if you have a rock-solid client with a reliable reputation, then the factoring fees will be lower as compared to a little known client that does not have a high-reputation and bank balance. Another factor is the number of credit days that you have extended to your client.

Thus, if you have provided a credit period of 30 days, then the factoring fees will be lower as compared to a client to whom you have provided a 60 or 90 days credit period. The final factor is the total amount of business that you manage to provide to your factoring company. So, even though the factoring fee percentage might initially be high, the figure could reduce once you start providing larger invoices to your factoring company. In certain cases, where the factoring company also handles your receivables, i.e. collecting the outstanding dues from your clients, the factoring company might also retain a percentage ranging from 5% to 10% of the invoice amount as security against your client defaulting on the payment or any other dispute.

These above factors will have to be taken into consideration, before you tie-up with any freight factoring company, since they will all be deducted from your profit margin. Hence, if you are already working on a very thin margin, then you might just end up giving your margin to your factoring company and this could fatally affect your business in the long run. Choose a factoring company that deducts a reasonable factoring fee and also one that does not retain any additional amount as security. Also ensure that the staff of the factoring company is courteous and their services efficient. Once you do start providing a higher volume of business, negotiate a better deal for your business.

Thus, if your clients are financially strong and if you have not provided a longer credit period, then you can be assured of lower factoring fees. However, do crosscheck the reputation and quality of service of the freight factoring company, before singing on the dotted line.