As a freight forwarder handling supply chain management and logistics challenges, you must juggle many tasks at once. However, one of the most challenging tasks to handle is managing your cash flow.
Managing cash flow
Managing cash flow can be challenging because a freight forwarder needs to manage competing interests. Shippers, for example, want comfortable payment terms – usually up to 60 days after shipment. Warehouses and carriers, on the other hand, want quick pays.
Unless your company has a cash reserve, quick expenses and slow revenues can be a recipe for problems. One way to solve this problem is to accelerate your revenues using freight factoring.
How to solve the common cash flow problem
Factoring solves this problem by accelerating revenues tied to slow-paying invoices. A financing company acts as an intermediary and advances funds using your invoices as collateral. This solution provides your company with immediate funds to pay employees, carriers, warehouse partners, and other vendors; it also enables you to offer payment terms to customers.
Basically, this solution provides many of the benefits of quick pays without requiring that your clients pay sooner.
Simple transaction structure
Transactions are fairly simple and are often structured using two payments. Most factoring companies can advance up to 90% of the amount outstanding for your eligible receivables as an initial payment. This amount is wired to your account once the services have been provided and the invoice has been verified. Your forwarding company gets the remaining 10%, less a fee, once the invoice is paid in full.
The main benefit of using a freight forwarder factoring solution is that your company can offer payment terms to clients without having to worry about slow-paying invoices. This benefit can improve your cash flow very quickly and position you to handle growth. If your company was unable to take on new clients due to financial problems, this solution can be a game-changer.
Another advantage is that the size of the financing line is determined by the quality and size of your invoices. The line can increase as your sales grow, making it an ideal solution for fast-growing forwarders with cash flow problems because of slow-paying customers.
The cost of the line varies based on the credit quality of your invoices and the volume of receivables to finance. The cost is assessed as a percentage of the invoice value. Average costs range from 1.15% to 3.5% per 30 days.
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One strategic benefit of factoring is that it’s easier to obtain than conventional financing solutions. This makes it a perfect option for small freight forwarders who can’t get conventional financing.
To qualify, your freight forwarding company must meet the following criteria:
- Your shippers must have good commercial credit
- Your invoices/accounts receivable must be free of encumbrances
- Your company must be free of legal and tax problems
- You must have experience in the freight forwarding industry
Is freight factoring right for you?
You and your advisers are the only ones who can determine if freight factoring is right for you. If your main problem is that your clients are asking for net-30 to net-60 days terms, and you can’t afford to wait for their payment, then there is a strong chance that freight factoring can help your company.
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