Factoring is a financing solution commonly used by carriers and brokers that need financing. It helps improve the company’s cash flow by financing slow-paying invoices. The solution provides the company with funds to operate the business more effectively. This article explains how factoring works and addresses some specific details about the due diligence for carriers based in Quebec. We cover:
- Slow payments cause cash flow issues
- Quick pays don’t always work
- What is freight bill factoring?
- Qualification requirements
- Underwriting process
- Is freight bill factoring the right solution for you?
1. Slow payments cause cash flow issues
Well-established shippers often negotiate 30- to 45-day payment terms into their contracts. These terms allow the shipper to pay an invoice four to six weeks after you have delivered the load to its destination. This situation is common in the transportation industry.
Owner-operators and small carriers often find it challenging to wait a month or longer for payment. They already have incurred the expense of picking up and delivering the load. These expenses, which include fuel, repairs, and truck payments, must be paid from the carrier’s cash reserve.
An unexpected result of this situation is that the size of your cash reserve determines your ability to grow. Companies with thin cash reserves must either grow slowly or risk getting overextended. Unfortunately, it does not take a lot to become overextended. This situation must be managed correctly, or it can lead to serious financial problems.
2. Are quick pays the solution?
One simple way to improve your cash flow is to ask your shippers to quick pay your invoice. Quick pays are the transportation industry’s version of an early payment discount. They are simple to use. The shipper or broker pays your invoice in less than ten days and gets a 2% discount off their invoice.
Quick pays are a great option but have two limitations. Every shipper doesn’t offer them. Furthermore, shippers that offer quick pays have the option to discontinue them. This limitation creates some uncertainty, especially for carriers whose cash reserves are minimal.
Using quick pays helps if your company’s cash flow problems aren’t too serious. However, if quick pays don’t improve your cash flow as expected, or if your shippers don’t provide them, consider using freight bill factoring.
3. What is freight bill factoring?
Freight bill factoring is a financing solution that helps solve the cash flow problems created by slow-paying shippers. It allows transportation carriers and brokers to finance their invoices. This financing gives them the funds to pay ongoing business expenses, strengthening their cash reserves and enabling them to take on new clients. To learn more, read “What is Freight Bill Factoring?”
Invoices are financed using a full-advance (single-instalment) or a two instalment process. Carriers can choose whichever option works better for them.
a) Full-advance factoring
Full-advance factoring uses a single-instalment advance. It is the preferred option for owner-operators and small carriers. The factoring company advances the carrier up to 98% of the invoice and deposits the funds into their bank account. The funds that weren’t advanced become the factoring company’s fee once the invoice settles.
b) Two-instalment factoring
In a two-instalment factoring transaction, the factor advances 90% of the invoice as an initial instalment. The remaining 10%, less the factor’s fees, is deposited into your account as a second instalment when your client pays the invoice. More established trucking carriers prefer two-instalment factoring because it has lower costs.
Using a factoring solution has some advantages over conventional financing. Most importantly, factoring solves truckers’ most common cash flow problem. It can also be deployed faster than other solutions.
Freight factoring is easier to obtain than conventional financing and has easier qualification requirements. Lines have flexible limits and are tied to your accounts receivable. The line adapts and can increase as your company grows and hauls more loads.
5. Qualification requirements
To qualify for factoring, your transportation company must meet the following requirements:
- Trucking company documentation/permits
- Creditworthy commercial clients
- Unencumbered invoices
- No major tax problems
- No major legal problems
6. Underwriting process
In general, all factoring companies follow a similar due diligence process. However, one point is specific to Quebec.
The factoring company secures its position by using your accounts receivable as collateral. Rather than using a PPSA, they use a hypothèque to secure their position. Some factoring companies don’t have the infrastructure to manage hypothèques and cannot offer factoring in the province. However, the list of companies working in Quebec is growing.
7. Is freight bill factoring the right solution for you?
Each company’s situation is different, and you should consult a qualified expert if you are uncertain. Factoring your invoices can help your company if your:
- Main problem is slow-paying clients
- Profit margins exceed 15%
- Invoices pay in less than 45 days
Get more information
We are a leading factoring company in Quebec and can provide you with high advances at low rates. For information, get an online quote or call toll-free (877) 300 3258.