Short payment terms for transport & logistics? Receive your money within 1 to 2 days with factoring. Read our blog post to learn more.
Like many sectors, transport logistics also has to deal with long payment terms and often equally long payment delays. Companies are already working with low margins. “Factoring allows you to be paid more quickly and increase your turnover”, often argues the supplier. But how does factoring actually work and what should you avoid? In this blog post, we’ve summarized the highlights and some valuable expert advice.
1. How does factoring work and what are its benefits?
Factoring is very easy to explain when you know how a transport service works. Indeed, the transport company literally goes to the checkout: It makes the pre-financing for its customer and assumes all the risks until the latter has paid the invoice. When a company is unable to carry out the transport, it entrusts it to another company. The same is true for factoring: It is possible to cede your financing risk by entrusting a factoring company with the pre-financing of your invoices.
Factoring is therefore a financing service that allows the sale to a factoring company of receivables that are not yet due. The latter takes over the rights to the receivables and settles them on presentation of proof of execution of the transport order concerned Utah Truck Dispatch Services. Concretely, 80 to 90% of the amount due is generally paid within 24 to 48 hours , as most providers of this type of service claim. The balance is paid by bank transfer as soon as the client has paid the full amount due to the factoring company. This avoids long waiting times. It is also possible to outsource the dunning process and the risk of non-payment, called del credere risk.
2. What are the costs of factoring?
Factoring costs are borne by the ordering carrier. In general, they have two main components:
They are comparable to the usual interest of banks on current accounts. The amount of this interest varies according to the solvency of the principal company and the solvency of the debtors. In addition, the amount of this interest will be calculated from the time factoring is used and until receipt of payment from the debtor, ie, according to the actual payment deadlines. The faster the invoice is paid to the factoring company by the debtor, the lower the interest to be paid by the carrier.
This flat rate is invoiced for the assumption, by the factoring company, of the risk of non-payment. The elements that determine this commission are the amount of turnover as well as the number of invoices and customers. In general, the factoring commission amounts to 0.5 to 2.5 percent of the invoice to be prefinanced.
As a rule: The factoring commission increases in proportion to the amount of turnover. Factoring interest is also lower if the company is in good financial condition.
3. What are the different forms of factoring?
Factoring comes in many forms that offer different possibilities. Here is a brief overview of the most popular shapes:
Performance bond factoring is the most common form. The factoring company assumes all the risks. Even if the debtor were to fail to settle his claim. This form guarantees the factoring company’s client that its claims will be paid on time.
Factoring without performance guarantee designates, by analogy, the form which provides no guarantee of payment, i.e. the customer of the factoring company assumes all the risks of non-payment.
With open factoring, debtors are notified that their receivables have been sold. In Germany, performance bond factoring is often combined with open factoring.
If debtors are not informed about factoring, it is called non-notified factoring.
Reverse factoring is used to obtain discounts or rebates when purchasing products or acquiring services. The instigator of reverse factoring is the debtor who allows his suppliers to benefit from the advantages of factoring. The invoice is paid directly by the factoring supplier, which allows you to benefit from a reduction and a longer payment period.
All- inclusive factoring also includes the dunning process or a collection service.
4. Who can benefit from the advantages of factoring?
Many small and medium-sized businesses work with low profit margins and issue reservations because factoring generates additional costs. But, in the long term, this service can generate an increase in their turnover , because they can accept more orders. The risk of non-payments is thus minimized. In addition, companies that use this service no longer have to advance payments, so they have more capital to invest.
5. Benefits of factoring for carriers
The pre-financing of invoices by a factoring company in particular enables logistics service providers, who generally have to wait a very long time before receiving their money, to improve their solvency and liquidity . Expenses are settled immediately and the remaining financial resources are invested. This allows you to increase your turnover as well as your potential profits. This also gives you a significant competitive advantage.
Overall, factoring allows you to minimize risk and administrative expense and focus more on your core business . Before opting for a factoring service provider, we recommend that you, as with any other contract, carefully study the conditions and compare them . They must be clear and transparent, without having recourse to the translation of a lawyer. This will help you find the factoring model best suited to your business.