The Freight Factoring Transaction: Reserve and Advance
Invoice Factoring is structured much differently than traditional forms of business financing. Its purpose is to provide an easy funding solution to companies based on the credit strength of the trucking company’s customer base. As with most lenders, the Factor will seek to gain protection against payment default. This is normally achieved by means of breaking the invoice financing transaction into two amounts; the “Advance” and the “Reserve”.
The advance is the first installment of funding paid to the trucking company when the customer is invoiced. It is based on a percentage of the invoice face value.
The higher the advance, the more working capital is made immediately available.
In the trucking industry, the advance generally ranges from 85% to 95% of the face value of the invoice being factored. In cases where the factoring company specializes in trucking, the Advance is usually higher and may be as much as 100%. For this reason alone, it is recommended to utilize the financial services of a trucking specialist factoring company. The higher the advance, the more working capital is made immediately available to support ongoing operational costs.
A specialized factoring company for trucking ensures a greater amount of advanced funding.
The reserve is the second installment of funding paid to the trucking company when the customer pays the invoice in full. It is based on the remaining percentage of the invoice face value after the advance is paid.
The purpose of the reserve is to provide the factor and the trucking company with a cushion should the customer fail to pay an invoice. Should an invoice go into recourse (non-payment within a set number of days) the trucking company is obligated to buy back the invoice (see Recourse Factoring). Should the trucking company fail to meet this obligation, the factoring company enacts the reserve. The combined reserves from the multiple invoices being factored by any one trucking company acts as a buffer that can be drawn against to compensate for payment defaults.
It is important to realize that measures used to protect against payment default varies widely from one factoring company to another. For highly specialized factoring companies that serve the trucking industry, the risk aspect is mitigated by intimate industry knowledge and accurate credit analyses of the company’s customer base. By collecting and maintaining current data on thousands of debtors, these specialized factoring companies are able to instantly assess credit risk and efficiently implement risk management measures without the need to impose large reserves against the transaction. Utilizing the services of a specialized factoring company for the trucking industry ensures a greater amount of advanced funding.
Copyright 2019, Accutrac Capital Solutions Inc.