The United States is home to a vast network of manufacturing sites that can produce nearly anything from cars and trucks to furniture, books, household electronics, and much more. But it is not enough to simply make these goods, since they need to be transported, too. This is where carrier companies come in, and countless carrier companies offer trucks, airplanes, ships, and trains that can deliver freight nearly anywhere, such as from factories to warehouses. Most of these carrier companies are on the smaller side, and they often have a few trucks in their vehicle fleets. Running such a company involves expenses, and a carrier company might not receive invoices from customers in time to cover those expenses. Thus, factoring services can handle this with loans, and smooth out the client’s cash flow. But how does invoice factoring work? A new business owner wondering “how does invoice factoring work?” will soon find out why business invoice factoring firms prove so popular and helpful.
Running a Carrier Company
Most companies in the United States are small ones, and together, they add up to represent a large portion of the American economy. In fact, small businesses (those with under 500 employees) account for nearly 99.7% of all business in the United States, and that includes carrier companies, too. Large companies may have whole fleets of ships and a hangar’s worth of airplanes, but a small carrier company will instead offer truck for shipper clients to use. Trucks are very useful, since they can travel to areas that planes and trains cannot reach, and they are not nearly as expensive to purchase and maintain. Such trucks can use any roads anywhere to make deliveries.
These companies earn their money from charging invoices to shipper clients, and on-time invoices will be paid within 60-90 days or so. The problem is that even if invoices are paid on time, they may be too late to help a company pay for its expenses, and sometimes invoices are paid late. A small carrier company does not have deep cash reserves to fall upon to cover expenses such as truck leases, employee salaries, truck repair, or advertising or truck fuel. To avoid bankruptcy, these small carriers will turn to local finance factoring firms and invoice factoring firms, which offer business loans to interested clients. Now the question is: how does invoice factoring work?
Making the Loan
Asking “how does invoice factoring work?” is something a new carrier company owner may ask. To begin with, once a carrier company has made a delivery and charged an invoice to a shipper, that business may turn to local invoice factoring firms to get a loan. As mentioned earlier, small companies have thin cash reserves, so loans are very helpful while an invoice’s payment is outstanding. If a carrier company has good business credit (which is distinct from personal credit), then an interested factoring firm will agree to an invoice factoring loan.
The factoring firm will purchase the right to collect 100% of the invoice once the shipper customer pays it. In the meantime, the factoring firm will provide a substantial loan to the carrier company, often worth around 70-80% of the invoice’s total value. The timing of this up-front loan is essential, as a carrier company needs that money to cover various expenses. This smooths out the carrier’s cash flow and protects it from bankruptcy while the invoice is still outstanding.
Once the invoice is fully paid, the factoring company will collect 100% of that invoice, as agreed upon earlier. Now, with the invoice money in hand, the factoring company will provide another and smaller loan to the carrier company, and these loans may add up to around 95-98% of the invoice’s total value, but never 100%. The remaining 2-5% is what the factoring company keeps as its fee for services rendered, and that and the collected invoice are the factoring company’s source of income. Meanwhile, the carrier has exchanged that 2-5% value for the immediacy of getting a large up front loan to cover expenses. When handled correctly, this exchange can be very much worth it to the carrier company. A carrier company may make many such loans until it becomes large enough to be self-sufficient, in some cases.