Freight Factoring Explained: How Truckers Get Paid Faster

Making your trucking business successful in today’s economy requires more than just moving goods from here to there. Staying on top of your invoices is key to keeping your business running smoothly. Freight factoring can help you manage your cash flow by eliminating the need to chase down invoices.

Learn all about the basics of freight factoring, how it works, and how it can help you improve your cash flow so you can decide if it’s a good option for you.

What Is Freight Factoring?

Freight factoring involves selling your invoices to a freight factoring company at a discount in exchange for faster payment. Without freight factoring, you might end up waiting an average of 40 days to receive payment after picking up and delivering loads. This delay can interfere with your cash flow, particularly if your clients take longer to pay — sometimes up to 90 days.

With freight factoring, which is also called invoice factoring, you invoice a factoring company rather than your customer, and the factoring company pays you promptly, typically within a few days.

For busy owner-operators and small trucking companies looking for trucking cash flow solutions, freight factoring can be an efficient method of accessing business capital without taking on debt. These third-party factoring companies will purchase your invoices so you can focus on growing and running your business instead of sending out invoice reminders.

Benefits of Trucking Factoring

Outsourcing your invoice collections to a freight factoring company can simplify your accounting process. The benefits of factoring include the following:

Faster Payment

With freight factoring, you can often get paid the same day you deliver goods. This is faster than any other option, including Quick Pay, which usually takes three to seven days. Having faster access to your money allows you to use it for business expenses as you scale your operation.

Less Administrative Work

The freight factoring company handles contacting brokers or suppliers, collecting payments, dealing with overdue invoices, and processing payments — which means you don’t have to. This is particularly useful for independent owner-operators and smaller companies that don’t have dedicated staff to deal with accounts receivable.

Fewer Risks

Factoring companies often handle prequalifying brokers to reduce the risk of nonpayment. They can run credit checks to help you avoid dealing with untrustworthy suppliers or brokers. Because freight factoring companies work with a wide range of brokers, they can alert you to those who pose a high financial risk.

Better Cash Flow Management

When you know exactly when you’ll get paid, you have an easier time budgeting and managing your cash flow. You don’t have to accommodate invoices that are languishing in accounts receivable when you’re forecasting income and expenses. If you need more available cash to expand or run your business, freight factoring can fill that need without you needing to take on debt.

Drawbacks of Freight Factoring

Despite its advantages, freight factoring isn’t the best choice for every trucking business. There are some drawbacks to consider before you make a decision.

Higher Costs

Freight factoring rates can be higher than interest rates on traditional loans. It will also usually cost more than collecting your invoices on your own, particularly if your brokers tend to pay promptly.

Cycle of Dependency

Many truckers turn to freight factoring when they need to raise extra cash for a quick fix to a financial problem. However, if you don’t have a plan for how you’ll exit the relationship, you may find yourself stuck in a cycle of relying on freight factoring for ordinary business operations.

Extra Layer Between You and Your Customers

The invoice factoring company you work with will collect from your customers directly. Although most are professional and courteous when dealing with them, you will lose control over this aspect of customer service. If you pride yourself on delivering exceptional customer service in all transactions, you may want to skip factoring and continue working with brokers directly.

Types of Freight Factoring

There are two primary types of freight factoring: recourse and non-recourse. The difference between them is who bears the liability of nonpayment.

Recourse Factoring

With recourse factoring, you are responsible for unpaid invoices. You’ll need to either buy back the invoice from the factoring company or replace it with another unpaid invoice of a similar amount. This shifts the burden of dealing with non-paying brokers to you. Recourse factoring usually means you pay a smaller percentage for invoices because the factoring company isn’t taking the risk.

Non-recourse Factoring

In non-recourse factoring, the factoring company takes on the risk of unpaid invoices in certain situations. Because of the higher level of risk, companies that offer this type of freight factoring typically charge higher fees.

If you choose non-recourse factoring, you should carefully look over the terms of your contract because the company may not cover all unpaid invoices. You may only have protection in the event that the broker or shipper declares bankruptcy. You also may not be able to include invoices from all of your clients in non-recourse factoring, particularly if you’re working with a company that has a bad credit rating.

Evaluating Semi-Truck Specs

Freight factoring for truckers is a relatively simple process, especially compared to obtaining a loan to raise capital.

You submit an application to a factoring company, and it vets you through an approval process that usually includes a credit check. Depending on the type of invoice factoring you choose, the company may vet your brokers and shippers for approval as well. Many companies will only accept invoices from approved brokers.
You deliver loads and obtain signed invoices as usual. The factoring company sets up your account so it can pay you when you submit invoices.
You submit an invoice and other paperwork, such as the rate confirmation and bill of lading, to the factoring company.
The factoring company pays you per the terms in your contract within two to five days. The factoring company will collect payment directly from the broker within 45 days.

These factoring companies make money by charging a percentage of your invoices, usually between 2% and 10%. Because they have systems, procedures, and resources in place to collect invoices in bulk, they can absorb the delay in collecting payments.

What To Consider When Choosing a Freight Factoring Company

The details matter when you’re signing up for invoice factoring. Before you commit, make sure you understand all aspects of your contract. Specifically, look at the following elements:

Rates

Factoring rates vary based on your business volume, the type of factoring, and the company’s policies. In addition to a percentage of your invoices, some companies charge a flat fee for setting up your account. Additional fees could also apply, such as wire fees, termination fees, and fees for not meeting monthly minimums. Make sure you include all fees when you’re calculating your profit.

Terms

Some factoring companies require you to submit all of your invoices, while others allow spot factoring. Spot factoring is when you choose which invoices you want to submit to the factoring company. On the other hand, some invoices may not be eligible for factoring due to a broker’s poor credit rating or other issues.

Should You Use a Freight Factoring Service?

Using a freight factoring service can be a good option in many cases, but there’s no one-size-fits-all answer to this question. It will depend on your resources, your outstanding invoices, and your business goals.

If any of the following situations apply to you, you may want to explore freight factoring to help you grow your business:

You need access to cash faster: If you need the money from unpaid invoices to cover operational expenses, freight factoring can get it to you faster.
You need working capital to expand your business: Freight factoring is a good option when you’re growing your business and don’t want to take on more debt.
You want to save time on back-office tasks: If you simply don’t want to collect invoices and handle the associated administrative work yourself, it may be worth the fee to have a freight factoring company function as your accounts receivables department.

Freight factoring can be a powerful financial tool, but it’s not right for everyone. If your profit margins are extremely thin and you can’t afford to give up the factoring fee, you’ll probably be better off collecting your own invoices. Also, if your customers pay promptly and you find it easy to follow up on invoices, it may not make sense to pay a company for freight factoring. Freight factoring companies deal directly with your clients, so you may want to avoid them if you’re working on building strong, long-term relationships.

Freight Factoring Can Help Secure Your Business

Trucking factoring can be a great avenue for dealing with slow-paying customers and ensuring fast payments. However, there are drawbacks as well as benefits in having someone else handle your invoices. Consider whether it aligns with your business objectives before you make a decision. Weighing all of your options is one way to protect your business as you grow.

Taking out a warranty from America’s Trucking Warranty also helps protect your business. Unexpected breakdowns and repairs can be devastating. Reach out today for a free quote and peace of mind.