Freight Factoring: A Boon to The Freight Industry |
Posted: October 6, 2022 |
The freight industry comprising logistics freight forwarders, rail, and trucking companies, often works on contracts that allow for a payment timeline of 30-60 days after the generation of an invoice. This means that a carrier has to wait for the agreed-upon duration until they receive the full payment from freight forwarders or brokers and shippers for carrying the freight already delivered from its source to destination. On average 60% of these payments are delayed. This calls for the carrier to follow up for payments until the freight invoices are cleared. To help sort this issue out for the carriers, freight bill factoring companies came into play. Financial institutions that facilitate carriers with immediate payment against freight invoices are called freight bill factoring companies. How Do Freight Factoring Companies Work? Invoice factoring or freight bill factoring companies buy the invoices from the carriers at a discounted rate of 1-2% in exchange for payment within 24-48 hours. This freight bill factoring occurs under two types of factoring contracts, recourse, and non-recourse. After this exchange, the freight factoring company is responsible to get the full payment from the shipper or freight forwarder whatever the case may be. What are Recourse and Non-recourse Factoring in the Freight Industry? Recourse factoring means the freight bill factoring company agrees to pay for the submitted invoice on the condition that if they are unable to collect payment from the client, the invoice will be returned to the trucking company to collect it themselves or from other credit agencies. For this type of factoring, the fee or discount rates are lesser than non-recourse contracts. A non-recourse factoring agreement states that the factoring company is solely responsible for collecting payments from the shipper. Since this transfers the trucking companies' credit risk onto the factoring company, the rates for such contracts are higher. Is Invoice Factoring Good for the Freight Industry? Delays in payments to the carriers, whether for land, air, or ocean freight, creates dissatisfaction in the service providers. Not receiving payments on time definitely affects the terms of business while causing a deficit of cash in hand for the trucking companies. When sharing freight quotes with the shippers, trucking companies with an immediate need of cash, quote the lowest to grab the contract. This is a harmful practice for their business as they will be compromising on the freight charges and yet have to wait for a long time for the payments. Invoice factoring is hence a boon for freight companies. It contributes to the carriers by providing them
With post-delivery tasks being taken care of, trucking companies only need to look into the services they provide, give the right freight rates and execute international shipping of freight seamlessly. Is It Worth Getting Discounted Payments in lieu of Invoice Factoring? A mere loss of 1-2% of the total freight charges when you are facing regular delays from multiple clients, is absolutely worth it. Receiving cash payment for an already completed task adds to the cash flow in the business. This cash flow can be used:
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