Running your own freight management or third party logistics (3PL) company comes with a ton of responsibilities. From managing your staff’s performance to delivering your loads on time, you have your work cut out for you.
But fulfilling these requirements doesn’t come at a whim. Along with proper planning, these tasks also call for a steady flow of operational funds. While the former needs you to hone your operational skills, the latter asks for unobstructed capital so you could cover your labor and overhead costs.
However, in an industry where your invoices may take 30-90 days to be paid, maintaining a steady cash flow can be nothing short of a challenge. Even when you have substantial capital to start with, you can start having funding problems down the road.
That’s where freight factoring comes in.
By looking into this specific funding method, you can resolve all your cash flow problems in a reliable and straightforward way. Instead of putting you in a cycle of repayments or eating away at your profits, freight factoring companies simply charge a nominal fee for paying your invoices before they are due.
If that sounds like something your freight management firm can benefit from, you should look into how freight factoring works and how it can help your 3PL operations keep its truckers on the road.
Freight factoring refers to the process where a trucking or 3PL company sells its unpaid receivables or bills of lading (BOL) for cash payments. Through the procedure, the freight and trucking factoring company that is buying these invoices pays the logistics firm the amount it is owed for its BOL.
By receiving the payment directly from the freight factoring company, the 3PL firm can ensure that its earnings are not in limbo for the usual period of 30-90 days. This sets the logistics firm free from chasing clients for the recovery of its receivables.
When these sold invoices are finally fulfilled by the respective clients in accordance with their due date, the payment goes to the freight factoring company itself. That is how these invoice factoring companies ensure that they can recover their investment in unpaid receivables.
In return, the freight factoring firm charges a set fee for these solutions. That is how these invoice factoring firms generate their profits and keep themselves afloat through their services.
By factoring their receivables, 3PL companies can usually receive 80-90 percent of the total cash value of each BOL. The rest of the amount is released when the factoring company receives the actual invoice payment by the respective client.
When it comes to logistics, it is quite usual for a 3PL company to wait for 30-90 days before it is paid for delivering its loads. Even when everything is done according to client expectations and quality standards in mind, the BOL by a logistics firm typically remains unpaid until it becomes due.
While some clients go the opposite direction and make these payments right away, that doesn’t happen often. This causes 3PL operations and late payments to go hand in hand.
But if you use freight factoring to get your BOL paid before they are due, your logistics company doesn’t have to wait for the typical period to fulfill its invoices. Instead, your firm can get paid within days of delivering a load.
The time it takes to factor your receivables and obtain cash payments usually depends upon the freight factoring company and its overall services. However, it generally doesn’t go beyond a few days.
As a result, freight factoring immediately reduces the delay that you may usually face in getting your receivables paid by respective clients. This ensures that you don’t have to wait until the last minute to get your invoices fulfilled.
From fleet maintenance to employee payroll, your 3PL company may have an abundance of expenses to take care of just to keep the lights on.
In a usual setting where you have to wait for 1-3 months to get paid for your logistics work, you often have to depend on your available capital to consistently support these labor, overhead, and operational expenses.
This is a stressful situation to begin with. But it can get even more daunting when your 3PL company heavily depends on its earnings instead of saved capital to run its operations smoothly.
If you don’t get paid for your work soon after it’s completed, these costs can create an excessive burden on your firm and keep you from maintaining your fleet and taking care of your drivers on the road.
But when you factor your receivables through a reliable freight factoring company, you can pull yourself out of these precarious situations with the utmost ease. By getting 80-90 percent of the cash value of each receivable almost immediately, you don’t have to worry about funding your operations.
Through the cash that you get through your factored invoices, you can easily support your labor and overhead expenses without having to think twice. This helps you keep your operations running without any hiccups.
Thanks to the availability of various specialized freight factoring companies, you can choose from two different types of factoring mechanisms. They are called recourse and non-recourse factoring and mainly differ due to the liability that they bring with their funding.
As the more widespread invoice factoring mechanism of the two, recoursefactoring comes with a lower service fee as compared to non-recourse factoring. It is also more easily available than its counterpart and can be found through various freight factoring companies.
However, this type of invoice factoring holds your logistics company liable if your clients become insolvent or do not pay their respective invoices. As such, if your clients are unable to fulfill the sold receivables, you need to foot the bill out of your own pocket and return the amount that you received by selling your BOL.
In comparison, non-recourse factoring is a bit harder to find and access, comes from select companies only, and carries at a higher service fee. But the main benefit that it carries for logistics companies is how it reduces the risk of liability with its funding.
It’s because non-recourse funding does not hold your 3PL firm liable if your clients are unable to pay their invoices due to bankruptcy. This protection also applies to a few more reasons that are defined in your contract at the time of selling your BOL. This makes sure that you can use the cash from your sold invoices with more confidence.
No matter the type of freight factoring service you move forward with, receiving cash against your unpaid BOL can help you with supporting and growing your operations over time.
Apart from covering employee payroll and benefits, the capital you receive from factoring your receivables also helps you maintain your fleet during its consistent use. This makes sure that you are able to support your truck drivers through their highly stressful duties and ensure that they don’t feel stranded by unforeseen events.
Whether you have some existing capital or consistently save through your incoming profits, a steady cash flow can help you with your plans for expansion. Since you don’t have to worry about covering critical operational costs while waiting for payments, you can use your additional funds towards growing your operations.
Waiting on payments that are unlikely to come for months can often keep you from taking on new work due to funding problems. By factoring your receivables, you can steer clear of this issue and have ample financial support to take on demanding deliveries. This ensures that you can get consistent work and don’t have to turn down any opportunity.
While any 3PL company or generally any business is running into cash flow problems, it is quite common for them to turn towards payday loans or other lending products to resolve their issues.
However, if your company gets into these lending programs, it often has to pay for sky-high interest rates and disrupt its long-term profitability. In case you take a loan on short-term but your clients don’t pay their invoices due to bankruptcy or a similar reason, it can also leave you stranded with twice the loss on your head.
Similarly, if you seek quick investments, they can often come at unfavorable terms that target a huge chunk of your future profits. These particular arrangements can also be quite disadvantageous for you, your company, and your employees.
On the other hand, the transparent terms of freight factoring remain free of unjustifiable interest rates or hostile conditions. You can easily factor your receivables against a set of understandable terms and pay the required fee to the factoring company. In case of non-recourse factoring, you can also save yourself from liability in a variety of scenarios.
That is why, freight factoring is considered as one of the most sought-after ways for 3PL companies to keep their operations running without putting them in jeopardy.
Ease of use further adds to the benefits of the freight factoring process. In order to factor your receivables, you simply need to get basic documents such as your respective BOL as well as your clients’ information in order. Once the freight factoring company does the required assessments and credit checks, you can get an answer about your application within a few days at most.
This makes the mechanism a popular and advantageous way for you to keep your logistics company running on all cylinders. As long as you are vigilant about the terms and get your invoices factored by a reliable vendor, it can help you move forward with your goals without any issues.