Factoring is a financial transaction whereby a company sells its accounts receivable (invoice) to a factoring company at a discount to obtain cash.

The sale of the receivables transfers ownership of the receivables to the factor. This means that the factor obtains all of the rights and risks associated with owning the receivables. The factor also obtains the right to receive the payments made by the company’s customer for the invoice amount.

Three principal components to the factoring transaction:

Advance – The advance is a percentage of the invoice face value that the factor pays to the selling company upon submission.

Reserve – The reserve is the remainder of the total invoice amount held by the factor until the payment by the selling company’s customer (debtor) is made.

Fee – The fee is the cost associated with the transaction that is deducted from the reserve prior to its being paid back to the seller. The interest charge fee is calculated based on the advanced amount outstanding, multiplied by the agreed–upon interest rate.

Advantages

• Immediate availability of cash
• Analyzing creditworthiness of your customer
• The emphasis is on the the creditworthiness of your clients, not yours
• Factoring is not a loan – it is a sale of receivables

Freight Invoice Factoring

Cutthroat competition, the increasingly unforgiving credit markets and tardy invoice payment behavior of the customers are creating a variety of challenges for transportation companies.

In an industry that requires significant capital expenditure and investment, and with long-term high fuel prices putting pressure on business leverage is often required. As a result, the trucking companies are increasingly taking up the factoring services offered by factoring companies. The transportation market in North America has matured significantly and is now recognized factoring as simply a smart management tool for growing business.