According to the Business Dictionary, invoice factoring is the selling of invoices to a third party company to improve cash flow.
When a business uses invoice factoring, they benefit through an immediate boost to cash flow, while at the same time eliminating the back office support needed to manage the accounts receivable process.
How it Works
- Deliver the load from Point A to Point B
- Assemble rate confirmation and Bill of Lading (BOL)
- Submit your invoice to a factoring company
- Receive same-day funding*
*Not all companies are able to provide same-day funding.
Why Should I Factor?
Most companies use factoring to improve and provide a consistent cash flow for their operation. Factoring provides immediate funding instead of the typical wait time of 30, 60 or even 90 days to get paid. In addition, factors typically provide back office support to your business in collecting the invoices and monitoring your customer’s credit.
Factoring and Your Growth potential
Bank
After someone delivers their load from Point A to Point B, the individual must wait 30-90 days to receive payment. Oftentimes, this time frame leads the individual to taking out a loan from a financial institution in order to cover their bills.
However, say you get a loan from a bank for $10,000 at 12%. You could make payments of $100 and in 12 months you will have paid $1,200, but you still owe $10,000 as you have only paid off the interest.
Factoring Company
When an individual delivers a load from Point A to Point B and decides to work with a factoring company, he or she is oftentimes left with no debt added to the balance sheet after one year.
Consider this, if you factor $10,000 worth of invoices each month at a 2% discount rate, in 12 months your fees would total $2,400 ($200 x 12). However, you would have received $117,600 (12 x $10,000 – $2,400) and your cost for $120,000 in cash advances from the factoring company would only be $2,400 with no debt added to your balance sheet.
For more information on your factoring options, contact Concept Financial.
If you have other questions regarding your trucking business or commercial trucking insurance, talk to someone at Truck Writers today.