Freight bill factoring companies offer instant finance against freight invoices. The amount of advance ranges between 70, 90 and even 97% of the invoice value, depending on the specific terms of the factoring agreement between the transporter/freight brokerage company/ trucking company as also on the factoring company's internal policies.



The need for factoring arises because of the paucity of funds that transporters and others in the freight handling business face due to the expenses they bear in course of their business activity, in the absence of immediate payment from their clients. It forces a transporter to spend his own money or make arrangements to have money available for covering all expenses for efficiently running his business without depending on immediate payment from the client, post delivery of goods.

It is of paramount importance because without meeting these expenses regularly the transporter's business will come to a standstill making him lose the business and become bankrupt in no time. The wheels of the trucks have to be kept rolling for sustaining the business. To ensure this, the payroll expenses, fuel expenses, money for purchase of tires, repair and maintenance expenditure and many other sundry expenses have to be procured on a day to day basis.

Transporters/freight brokerage companies and others involved in the freight business generally do not have the required cash reserve to meet these vital expenses on their own. Bank financing is difficult to obtain as generally the borrower will have to provide evidence of successful profit making by the business for at least three years preceding the request for finance. Any individual or company in a transportation business that has been operating successfully for the last three years would have the necessary wherewithal for managing its finances without any loan assistance from the bank, whereas one new to the business would be unable to provide the required evidence. So bank financing does not offer a proper solution for such finance.

On the other hand, freight factoring companies provide quick and easy finance by purchasing the freight invoice. A factoring agreement is entered into between the transporter and the factor. Thereafter, the transporter accepts all loads with confidence and after delivering he bills his clients in the usual way and forwards the bill to the factor. The factor advances cash to the transporter within 24 hours of receiving the bills in accordance with the terms of the factoring agreement. If the agreement has a non-recourse invoice factoring clause, the factoring company also covers the risk of non-payment in case the transporter's client goes out of business or becomes insolvent.

This way the transporter receives immediate cash for his needs while the factor waits for the client to pay. Once payment is received from the client, any amount held back with the factor is rebated. The fee charged by the factor is usually 1.5 to 3% of the monthly invoice value which may appear very affordable. The percentage depends on the total monthly invoicing and the length of time for which an invoice is factored. However, even if it appears quite low, the fact remains that the factoring fee amounts to 1.5 to 3% of the entire value of the invoice of which actual profit, after deducting expenses and overheads, forms just a small part. Therefore, it eats considerably into overall profits of a factor's client.