What is Factoring?
You’ve probably experienced it before; your short-term bills are more than the cash you have in the bank. While this can be a sign of bad cash flow management, it can also happen to profitable businesses that are growing quickly but are waiting for their invoices to be paid.
One solution to cashflow challenges is factoring. Factoring is one of the world's oldest forms of commerce, dating back thousands of years, and today accounts for over $4 Trillion CDN* in annual transactions.
What is Factoring for Transportation?
Factoring is when a finance company, called a Factor, provides cash to a business to purchase their current invoices, thereby improving their cash flow.
Factoring occurs in almost every business sector and is used extensively in the transportation and logistics industry.
There are 3 steps to transportation factoring:
1. The Carrier sells outstanding invoices to a Factor.
2. The Factor advances cash to the Carrier equal to 95 - 97% of the invoice amount, usually within 24 hours. The remainder being held in 'Reserve'.
3. The Shipper/Broker pays the outstanding invoice amount to the Factor when due. The Carrier then receives a rebate from the 'Reserve' funds, less the Factor’s fee, which is typically 2% - 3% of the invoice amount.
Why do Carriers use Factoring?
1. Stay Alive - Even if a Carrier is profitable and growing, if it does not have enough cash flow to pay its’ bills then it can go out of business.
2. Unlimited Growth – With unlimited access to cash a Carrier can take on new business, hire drivers / owner operators, and pay their bills on time.
3. No Hassle of Collections – The Factor often takes responsibility of managing the invoices and payments for the Carrier. But the level of service a Carrier receives varies widely between different Factors.
4. No “Bad Debts” – It is recommended that Carriers use only non-recourse factoring, which means the Factor assumes the responsibility for nonpayment of factored invoices. J D Factors provides non-recourse factoring and assumes the credit risk - if an invoice factored with J D Factors is not paid for a credit reason, the Carrier is not liable. Most Factors are full recourse, which means the Carrier still must worry about default.
For almost 35 years J D Factors has been helping transportation companies across North America to grow and succeed. Our commitment to provide superior customer service has made us the premiere transportation factoring company in North America.
For more information visit jdfactors.com or call 403-370-7547 or 905-501-5000
* Factors Chain International, https://fci.nl/en/industry-statistics
About the author:
Gordon Onley, Business Development Officer, Western Canada - J D Factors
"Providing businesses in Western Canada with additional cash flow to support growth, without adding debt."
Contact Gordon Onley:
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