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Pros And Cons Of Using Freight Factoring To Increase Your Business

Every business requires an uninterrupted flow of cash to meet all related expenses and this is especially true in the trucking business. There are drivers' salaries to be paid, fuel and repair bills to be cleared and you might also need to keep a tidy amount ready for unexpected expenses, in case any of your trucks breakdown en-route to their destination.

Freight factoring can solve all these problems. In this process, a freight factoring company will 'buy' off your credit invoice that you have issued to your client and pay you the amount of your invoice minus a 'factoring fee', which could range between 1.5% to 5%. These companies can also take over your collection activity by collecting the payment from your clients on the due date and thus this method of finance is flexible and can provide you with an opportunity to flourish in your trucking business. However, there are some pros and cons to be kept in mind, before you rush to tie-up with any freight factoring company.

Pros:

The biggest advantage of entering into a freight factoring arrangement is that you will get your invoice amount immediately, even if you have issued a credit invoice. This will improve your cash flow and help you to meet your expenses, take on larger and longer hauls and even put into action any expansion plan that you might have nurtured. You will also require fewer documents and no collateral, without which you would not have gotten a bank loan anyway, even if you did wish for one.

The freight factoring company could, at an additional cost, also handle your receivables department, thus freeing your mind and staff from the trouble of running after your clients for your money. Since the incoming amount only depends on the value of the invoices that you 'sell' to the factoring company, you will not need to worry about any monthly installments or interest rates, which would have been the case, if you had taken a traditional loan.

Cons:

It is essential to conduct a thorough survey of the freight factoring industry, before you tie-up with a particular factoring company. The factoring company should be able to handle your account efficiently and should make your payments within the stipulated time for you to enjoy the benefits. Their staff should be available to hear your queries and should also be courteous and polite, while handling your queries. Some of your clients too might not like the idea of answering to a third party in financial matters.

You will therefore need to placate them, if you do not wish to lose them as your clients. If you are already working on wafer-thin profit margins, then by paying the 'factoring fee', you will only end up transferring your profit to your factoring company. This might prove to be disastrous for your business in the long run. If the factoring company is retaining a certain amount of the invoice as security against bad debt, then that too could prove to be troublesome, in case of any dispute with the company or your client.

Therefore, even though freight factoring seems to be an answer to all your financial woes, by not paying heed to the above points, you could end up in even more trouble.

Thus, it is important to study the pros and cons of this mode of finance, in order to avoid any pitfalls associated with it.

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