Factoring is a common practice in the trucking industry as a way to keep their finances in order and to collect debts quickly. In the trucking industry, bills and debts from so many companies can get complicated, and trucking companies are sometimes forced to wait a long time to collect the money they are owed. Factoring is advantageous for any trucking company manager who is tired of waiting for a long period of time before collecting each debt and needs the money on a shorter time scale.
In financial factoring, a business sells its accounts receivable, or invoices, to a third party factor. The business sells the accounts receivable at a reduced price in exchange for immediate funds. Some businesses have a varying cash flow– meaning that they have a large cash flow during some periods and a very small cash flow during others. Therefore, some businesses find it necessary to have their debts paid immediately in order to continue their business in a timely manner, rather than waiting for money to come in before making the next business transaction.
How is factoring different from a loan?
There are three big differences between a bank loan and factoring.
Loans depend on a company’s credit score; factoring depends on the value of the company’s receivables.
A loan involves borrowing money; factoring is a purchase of a receivable.
Bank loans involve two parties; factoring involves three.
How does truck factoring work?
Truck companies sell large quantities of products and services to other businesses each day. The price of these transactions is large, but often, the trucking company cannot collect the debt from the other business for a month or more. Therefore, the trucking company uses a third party, the factoring company, to help them receive money immediately. The factoring company essentially buys the debt owed to the trucking company. They give the trucking company the amount of cash they are owed by other companies, keeping a small percentage. Then, the factoring company collects the debts from the other companies.
Why is truck factoring a good option?
Truck factoring is a good option for any truck company who cannot afford to have money owed to them for extended periods of time. The factoring company gives the trucking company the money they need immediately, then collects the debt later.