Avoiding Common Pitfalls in Trucking Factoring

Truck factoring might be among the most valuable tools if you are in the early stages of your trucking company and have issues managing cash flow. It is a financial service that provides cash advances to trucking companies by purchasing their outstanding invoices at a discount. 

However, according to Simplex,  even though factoring can be a helpful tool for managing cash flow, there are some common pitfalls that you should be aware of. Here are some common pitfalls in trucking factoring and what you should do to avoid them!

 

Understanding the Terms and Fees

When you sign a factoring agreement, you should first make sure that you understand the terms, conditions, and fees associated with the service. What you should pay most attention to are the following:

• Factoring fees
• The reserve amount
• Any additional fees or charges

Read the factoring agreement carefully and see if any provisions may limit your ability to work with other lenders (exclusivity requirements) or require you to provide personal guarantees. In some trucking factoring agreements, there might be hidden fees in the form of extra charges. This is why you should review all invoices and statements to avoid not getting charged for services you didn’t agree to.

Check Out the Factoring Company’s Reputation

Factoring can provide quick access to cash advances on your outstanding invoices. Still, before working with any truck factoring company, you need to do your research and ensure they have a good reputation.

Among the best ways to ensure that your new partner is reliable is to check out the following:

 

• Online reviews or asking for references
• Check if the company is licensed and bonded

After you decide to work with a good factoring company, you should be aware that you need to communicate with your customers about the factoring agreement and do your best to ensure excellent customer service and encourage timely payments.

When you work with a factoring company, the most vital aspect is, in the end, that your customers pay their invoices on time. 

Factoring Will Affect Your Profit Margins

How factoring will affect your profit margins strictly depends on the factoring company you decide to work with, what is stipulated in your contract agreements and conditions, and your customers.

Yet, a common mistake new trucking companies make when they work with a truck factoring organization is not considering the cost of factoring when pricing their services. To limit the impact of factoring in your profit margins, be sure to include the cost of factoring when pricing your services.

 

Not Exploring Other Financing Options

Factoring is an excellent solution to manage cash flow in the short term, and it’s easy to become over-reliant on these services. However, this doesn’t mean you shouldn’t ignore developing a solid business plan in the future and exploring other financing options as well. 

To ensure the long-term success of your trucking company, work with a reliable truck factoring organization and then seek out other financing options when the time is right.