Freight factoring options for a limited company

Understanding freight factoring and how it can help your transport business

Freight factoring helps limited companies operating in the transport and logistics industry to release the value of their unpaid invoices. It overcomes the common problem of late payments in the industry and boosts a company’s cash flow.

Factoring also releases valuable time to focus on growth as the factoring company takes over the payment-chasing process and debt collection as a whole. So how does freight factoring work and what are the different options available? 

How does freight factoring work for a limited company?

Once a factoring agreement is in place, you issue invoices to your customers as normal but these invoices are sold to the factoring company, which advances around 80-90 per cent of their value, usually within 24-48 hours.

The factor later collects payment directly from the customer, deducts their financing fee, and releases the remainder to your company. So if you think freight factoring might help you, what are your options?

Recourse or non-recourse freight factoring

These types of factoring arrangements refer to the level of risk taken on by your company and the lender. A factoring agreement with recourse makes you, as the borrowing company, liable to repay the factor if your customer defaults.

Non-recourse freight factoring, on the other hand, takes away this responsibility and so is less risky from your point of view. In the case of a non-recourse factoring agreement, your lender takes on all the risk, and although this can increase the cost of the facility, it does safeguard your company against bad debts.

Spot factoring/single invoice factoring

Spot factoring allows you to choose which invoices you put forward rather than selling your sales ledger as a whole to a factor. This type of freight factoring can be beneficial if your company issues large single invoices, as you can release significant sums.

Also known as single invoice factoring, this option is a flexible way to finance your business and can be highly beneficial if you’ve struggled to collect customer payments efficiently in the past.

Invoice discounting

Invoice discounting offers a confidential way to release the money held in your unpaid invoices. It doesn’t involve handing over your credit control function to the lender, so your customers will remain unaware of the arrangement.

This type of confidentiality might be important to your company if you want to manage your customer relationships yourself or don’t want to relinquish control of collecting payments each month.

Do you qualify for freight factoring?

The eligibility criteria for freight factoring agreements typically include:

• Selling to other businesses rather than directly to the consumer
• Operating with payment terms of 30-90 days
• Doing business with creditworthy customers who pay on time
• Operating with an annual turnover of at least £30,000

For more information on freight factoring options, please contact UK Business Finance. We’re experienced independent commercial finance brokers within the transport and logistics sector and will find the most appropriate type of arrangement for your company following a whole-of-market search.