A Complete Guide to Invoice Factoring for Logistics

The logistics industry keeps the world moving. At its core, financial fluidity is a vital thread that ensures the seamless movement of goods from point A to point B.
A woman with a tablet speaking to a logistics manager

A Complete Guide to Invoice Factoring for Logistics

The logistics industry keeps the world moving. 

At its core, financial fluidity is a vital thread that ensures the seamless movement of goods from point A to point B. However, businesses often find themselves grappling with cashflow challenges, seeking innovative solutions to bridge the gap between delivered services and awaiting payments.

These delays can leave businesses without the capital required to cover their operational expenses and pay their workers, which by extension limits their ability to take on new work. It’s a fruitless cycle. 

Invoice factoring for logistics can help. It provides logistics and supply chain management companies with the money they’ve earned right away so they don’t have to succumb to payment delays. Unlike other financing methods, it doesn’t sacrifice their financial future to address the present needs. 

This ultimate guide to logistics factoring will cover everything you need to know, from how it works to tips on choosing a factoring company.

What Is Logistics Factoring?

Invoice factoring involves selling accounts receivable to a third party (factor) to accelerate cashflow. In logistics, this means converting outstanding freight invoices into immediate capital.

This immediate payment means you don’t have to wait days, weeks, or even months to receive the money you earned for your work. By partnering with a supply chain factoring expert like REV Capital, navigating financial challenges synonymous with the logistics industry becomes easy.

Learn more about invoice factoring with REV Capital.

The nature of this kind of agreement means the factoring company then assumes the responsibility of collecting invoices from your clients. Once they have collected all outstanding invoices, they repay the remaining value minus a small fee. 

Logistics factoring is distinguished by its adaptability and flexibility. Unlike traditional financing options, invoice factoring is not anchored by a fixed sum or revolving credit line. Instead, the financing is directly linked to the volume and value of the invoices being factored. This makes it an ideal fit for logistics companies facing fluctuations in shipment volumes or dealing with seasonal demand variations.

→ Related resource: Why Is Invoice Factoring Crucial to Growing a Business

Factors evaluate the creditworthiness of both shippers and carriers, allowing for personalized financing terms. This risk assessment strategy enables factors to tailor their approach, ensuring that the financial arrangement aligns with the unique circumstances of each transaction. The flexibility inherent in logistics factoring provides breathing space for businesses to manage their finances dynamically, responding adeptly to the ever-changing demands of the logistics landscape.

The Money You Need

—When You Need It

How Does Invoice Factoring for Logistics Work?

Factoring simplifies the logistics process, which can involve many moving parts. Here’s a look at how supply chain financing plays out when partnering with an invoice factoring company like REV Capital.

Step 1

Logistics companies initiate the process by submitting outstanding invoices to a factoring company. These invoices represent the value of services rendered, such as shipping or warehousing.

Step 2

An evaluation is completed by the factoring company of the submitted invoices to assess the creditworthiness of the logistics company’s customers.

Step 3

Once the evaluation is complete and the contract is established, the factoring company advances a significant portion of the total invoice value—typically up to 98%—conveniently deposited into your bank account.

Step 4

The factor assumes the responsibility of collecting payment directly from the logistics company’s customers. When the customer settles the invoice, the remaining balance, minus a small fee retained by the factor for their services is remitted to the logistics company. Invoice factoring often involves an ongoing collaboration between the logistics company and the factor.

The Benefits of Logistics Factoring

1. Improved Cashflow

The most obvious benefit of supply chain factoring is streamlining cashflow. Getting up to 98% of the value of your invoices within 24 hours enables logistics companies to meet fuel and maintenance costs, payroll, and even invest in new opportunities without the burden of waiting for extended payment terms.

→ Related resource: 5 Tips for Better Cashflow Management

2. Expedited Business Growth

The growth of logistics companies is rarely capped by a lack of motivation or a shortage of potential clients. By unlocking cash tied up in unpaid invoices, invoice factoring empowers logistics companies to pursue growth initiatives. Whether expanding fleet capacity, investing in technology upgrades, or entering new markets, the immediate flux of funds facilitates strategic decision-making and propels business expansion.

3. Enhanced Operational Flexibility

Logistics companies know good and well that time is money. Rather than wasting yours chasing down late payments, logistics factoring shifts that burden onto someone else. This allows companies to scale their financial support dynamically, responding effectively to changing business needs without being tied to fixed loan amounts or rigid credit lines.

4. Efficient Debt-Free Financing

Invoice factoring for logistics is not a loan, which, given how interest rates are rising, makes it a more financially responsible solution. Businesses can access immediate liquidity without incurring long-term financial liabilities.

→ Related resource: How to Protect Your Business From Rising Interest Rates

5. Increased Negotiating Power

With improved cashflow and financial stability, logistics companies gain increased negotiating power in supplier relationships. Timely payments to suppliers can lead to better terms, discounts, and stronger partnerships. Invoice factoring, therefore, becomes not just a financial strategy but a tool for enhancing the overall supply chain ecosystem by fostering positive relationships with key stakeholders.

→ Related resource: How to Negotiate Better Payment Terms with Suppliers

a stylized graphic of a worker managing logistics on a tablet

Logistics Factoring vs. Other Supply Chain Finance Options

The logistics industry, with its unique financial challenges and operational dynamics, has several financing options beyond invoice factoring.

Line Of Credits

This form of supply chain financing might appear convenient on the surface, but peel back the layers and you’ll find a complex approval process leading to a cash payout that’s likely too small to meet your needs. 

Banks generally assess your fixed assets to determine whether or not to grant you a line of credit. However, for logistics companies—especially those just getting started—assets are continuously in motion. Between this and no guarantees you’ll be granted meaningful capital if approved, it’s clear where this option falls short.

Traditional Bank Loans

Borrowing money costs money—and often a lot of it. While you might feel good initially about the long-term, fixed-rate agreement, you’ll quickly discover why the bank was willing to lend you their money: because it makes them rich. 

This financing option also comes with lengthy approval processes and stringent credit requirements, both of which may hinder responsiveness to immediate financial needs.

→ Related resource: 5 Ways Invoice Factoring is Different Than a Loan

Asset-Based Lending (ABL)

This type of agreement is often seen in the logistics industry where physical assets are used as collateral. Pledging assets often leads to lower interest rates, but that comes at the expense of more risk for the company doing the pledging. 

Consider the risk-to-reward ratio: do you want to put up assets like equipment or real estate to get the money you need? Probably not, especially when invoice factoring exists as a viable alternative that doesn’t jeopardize any of what you’ve worked to build.

Say Goodbye To High-Interest Loans

How Supply Chain Factoring Companies Evaluate Risk

The factoring approval process tends to be more lenient than in the other types of agreements we outlined above. Nonetheless, the factoring company is assuming the risk of collecting invoices on your behalf after granting you a cash advance—they understandably still do their due diligence before agreeing to take you on as a client.

It’s ideal if your company is considered low-risk, which will be determined based on an evaluation of the following three variables:

Client Creditworthiness

The financial standing of your clients is more important to factoring companies than yours. This involves assessing their payment histories, financial stability, and overall credit profiles. Companies with reputable and financially sound customers are deemed lower risk.

Quality of Invoices

The nature and quality of the invoices submitted for factoring are closely examined. Factoring companies consider elements such as invoice accuracy, completeness, and adherence to legal and contractual requirements. Quality control in the invoicing process contributes to the efficiency of the factoring arrangement.

Industry and Economic Trends

Factoring companies analyze broader industry trends and economic conditions. They assess the stability and growth potential of the logistics sector, identifying any potential risks associated with the market fluctuations or economic turndowns.

 three employees discuss business operations in a warehouse

How to Choose a Logistics Factoring Company

Trust is a two-way street. The factoring company you choose is going to be interacting with your clients to collect invoices on your behalf. As such, they must understand how to navigate the logistics industry with professionalism and respect.

Consider the following variables when deciding who to entrust with your factoring needs:

Customer Service

Money can be a stressful topic. Choose a factoring company that prioritizes responsiveness and effective communication for this reason. A reliable and accessible customer service team contributes to a smoother and faster issue resolution. 

Transparent Terms and Fees

Thoroughly review the terms and fees associated with the factoring arrangement. Transparency in fee structures, including discount rates and any additional charges, is crucial for avoiding surprises and understanding cost implications. Clear terms foster a trusting and collaborative relationship between business and factor!

Industry Expertise

Assess the factoring company’s experience and expertise within the logistics and supply chain industry. A partner familiar with the nuances of freight, warehousing, and transportation understands the specific challenges and opportunities within these sectors. This understanding allows for tailored financing solutions that align with the unique needs of logistics companies.

The Logistics Factoring Qualification and Application Process

The most immediate prerequisite for qualification is being a business that works in the logistics industry. Beyond that, you can expect requirements to vary between factoring companies. Some common criteria include:

B2B service provider
North American customers
Monthly volumes up to $10 million
Clear audit trail
Creditworthy debtors
No consignment sales
No liens on A/R
No progress billing
No pre-billing
No warranties

Most logistics factoring companies accept online applications, a process in which you’ll typically need to share:

  • Information about your business: This could be anything from its annual revenue to logistics industry and customer demographics.
  • Basic details about your invoices: Payment terms and periods, plus any other notes related to your invoicing process.
  • Recent bank statements: Three to six months of statements—while not always mandatory—can often help factoring companies make their decision.

Ultimately, the specifics of this process will rely on the logistics factoring company. We recommend speaking with them directly to learn more, as the ins and outs can differ depending on their requirements.
→ Related resource: Experts Answer: Is Invoice Factoring Right For Your Business?

Logistics Factoring With REV Capital

REV Capital is the leading provider of invoice factoring for logistics in Canada and the United States. Our years of experience in providing businesses in this industry with the immediate financial needs they need to facilitate long-term growth and success have earned us this title.

Partnering with us means enlisting the services of a team that has a deep understanding of the North American logistics landscape and provides scalable factoring solutions. Logistics factoring should make your life easier—and with REV Capital it will.

With 24/7 access to a comprehensive online portal, industry-leading customer service, and competitive rates, no other factoring company can rival our combination of service and customer support.

Not Convinced Yet?

If you’re ready to experience the simplicity of invoice factoring for logistics, connect with a REV Capital Client Relationship Manager today. Your success is our priority.

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