Shortening Payment Terms: Why Factoring Is Advantageous For Logistics


Like many industries, transport logistics also has to cope with long payment terms and often equally long payment delays. Companies are already working with low margins. “Factoring allows you to get paid faster and increase your turnover,” the supplier often argues. But how does factoring actually work and what should you avoid? 

How does factoring work and what are its advantages?

Factoring is very easy to explain when you know how a transport service works. Indeed, the transport company literally goes to the cash register: it carries out the pre-financing for its customer and assumes all the risks until the latter has paid the invoice. When a company is unable to carry out the transport, it entrusts it to another company. It is the same for factoring: It is possible to cede its financing risk by entrusting, to a factoring company, the prefinancing of its invoices.

Factoring is therefore a financing service that allows you to sell receivables that are not yet due to a factoring company. The latter takes over the rights to the receivables and settles them upon presentation of proof of the execution of the transport order concerned. Concretely, 80 to 90% of the amount due is generally paid within 24 to 48 hours, as most providers of this type of service claim. The balance is paid by wire transfer as soon as the customer has paid the full amount due to the factoring company. This helps to avoid long waiting times. It is also possible to outsource the dunning process and the risk of non-payment called the risk of del credibility.

What are the costs of factoring?

Factoring costs are the responsibility of the principal carrier. In general, they have two main components:

  • Factoring interest

They are comparable to the usual interest of banks on current accounts. The amount of this interest varies according to the solvency of the principal company and the solvency of the debtors. In addition, the amount of this interest will be calculated from the recourse to factoring and until receipt of payment from the debtor, that is to say, according to the effective terms of payment. The sooner the invoice is paid to the factoring company by the debtor, the lower the interest payable by the carrier.

  • The factoring commission

This flat rate is invoiced for the assumption of the risk of non-payment by the factoring company. The elements that determine this commission are the amount of turnover as well as the number of invoices and customers. Typically, the factoring commission is 0.5 to 2.5 percent of the invoice to be pre-financed.
In principle: The factoring commission increases proportionally to the amount of turnover. Factoring interest is also lower if the business is in a good financial position.

Always ensure that you find a reliable 3PL Company in Los Angeles such as  Soonerlogisticscom that will deliver professional factoring services for your goods.