When you haul freight for your customer or freight broker, you would be issuing a freight invoice. You would then wait for 30 to 90 days depending on the credit given to your customer, for your payment to arrive. Freight factoring companies will "buy" this freight invoice off you and give you the invoice amount immediately. This payment will be in 2 installments. The first installment will be transferred to your account in 2 to 4 days and could be upto 90% of the invoice value. The 2nd installment will be the balance amount and will be transferred to your account after your customer makes the payment on the due date, minus the 'factoring fees'.

This means that you get your money almost immediately after making the invoice and this ensures that you can meet your expenses with ready cash. This will enable you to pay off your fuel bills and salaries on time and also enable you to take on new and bigger hauls, thereby increasing your business. This will mean increased credit freight invoices and consequently more business for your freight factoring company, and again more cash payments for you. A winning combination indeed, but you should be careful about some points, while hiring the services of a freight factoring company.

The 'factoring fees' could be from 1.5% to 5% of the total invoice amount, depending upon various factors such as the credit period of the invoice, the credit rating of your customer as decided by the factoring company and the total volume of business, you give to the factoring company. So, if you are giving more than 30 days credit to a customer, who is rated low on the factoring company's credit rating list, then the fees will be the highest.

That could reduce your profit margin substantially. The freight factoring company should also be able to handle your account efficiently and since they could also be taking over your payment collection from you, they would have to behave courteously with your customers or they could end up damaging your reputation and relation with your customer. Your customers will also have to be informed about your tie-up with the freight factoring company and some of them might not be very comfortable in dealing with third parties.

These problems could crop up, once you hire the freight factoring company. But, if you keep an eagle eye on their operations, you could quickly diffuse any tricky situation without ruffling too many feathers. Some factoring companies also offer 'non-recourse' factoring, whereby any customer defaulting on his payment will be the factoring company's problem and not yours. This will help you in concentrating more on increasing your hauling business, rather than losing sleep over bad debts. However, any additional service including this one from the factoring company will cost you more. You will have to decide finally, on which services you would require from them and which you don't.

So, freight factoring can be a boon for your budding freight business, but you should also understand the risks and charges associated with it.