What is Freight Factoring? The Ultimate Guide

So just what is factoring in trucking? Freight factoring, also known as trucking factoring, takes the invoices for the loads that you run and allows you to get paid on them now Instead of waiting for 30, 60, or even 90 days for a load to be paid out. This allows an influx of working capital to keep the business in motion in between invoice payouts.

This becomes a vital business tool in trucking as invoice payments are almost never made immediately; the transportation industry standard is 40 days (or more) to fully process payouts to drivers and trucking companies. These process times can literally make or break a freight company’s budget, and many have had to turn elsewhere to make ends meet from time to time.

In the past, many relied on bank loans or even credit cards to stay afloat when there are more “payouts” than “pay-ins” on the balance sheet. Not only is this hard to juggle, but it can end up costing thousands in interest payments – especially over time for the trucking companies.

With freight factoring for truckers, a company or owner-operator makes their delivery as usual, but instead of waiting on payment, they transfer or “sell” the invoice for the job to a third party company. This company will “buy” the invoice for slightly less than the total owed for the job, but they make up for it by paying immediately. With money in hand, the freight company goes about their business as usual, while the freight factoring company cashes in the invoice and does all the waiting.

For some freight companies – especially smaller or privately owned operations – this type of immediate payment will seem like a lifesaver for their weekly or monthly budget, allowing them to cover expenses without incurring any debt. Others on the other hand, will be extremely skeptical of the costs associated with the transaction.

Luckily, we’ve outlined all the details of how freight factoring works.

In the trucking industry getting paid quickly can be essential to being successful. Factoring allows you to submit invoices to your factoring company for same day processing and allows you to get paid on the invoice amount much sooner instead of weeks down the road. Like all business transactions, freight factoring works because there is an incentive for all the parties involved.

The incentive for the freight company or owner-operator is immediate payment instead of long waits. For the freight factoring company, the incentive is the percentage they charge or “leave out” of the invoice when purchasing from the driver, which translates to profit when they later collect from the customer. And finally, the customer’s incentive is that they get to deal with a company that has the financial collateral to wait for a payout rather than a small freight company that’s dying to get paid.

It is important to know the basic service that a factoring company offers to truckers, as well as the unique services that set them apart from all the others. TAFS has both! Our premier factoring services work to purchase your invoices from you and get you paid upfront, even in as little as one hour. In addition to factoring, TAFS also provides premium services to clients that will help you stay on top of your competition in the industry. Let’s take a closer look at how the invoice factoring process operates:

1. A company (customer) needs A shipped to location B.

2. They hire you to deliver it, and you do a credit check with your factoring company to see if the customer’s load qualifies for their services.

3. If so, upon delivery, you send the invoice and all paperwork for the load to your factoring company. (Paperwork such as the rate cone, bill of lading, etc. is usually submitted online or through a mobile application.)

4. They purchase that invoice, and you or your company receive payment.

5. The factoring company then collects the payment from the customer.

Depending on a number of situations, there may be a few additional steps involved in this process. For the sake of this discussion, it’s best to think of applying for factoring like seeking health insurance or trying to get a credit card. That’s because companies and owner-operators don’t just hire factoring companies, they apply for them. And it’s the nature of this application that will eventually determine the terms of the factoring agreement.

Many truck drivers and freight company owners wrongly assume that factoring is a new fad or just a bunch of predator companies looking for a quick buck. No need to worry – factoring has been around for a long time. Many small trucking companies can benefit from a cash advance allowing the working capital they need. The main reason for its growth in popularity of factoring is likely due to global economic factors and the increased cost of hauling freight than anything else.

Not every company or owner-operator uses factoring for the same reason. Cash flow assistance is a significant benefit for almost all who participate, but some larger transportation companies are more concerned with overall growth and taking advantage of a good spot market. For others, they merely lack the capabilities or man-power (either permanently or temporarily) to manage all the communication and payment collections that go along with multi-truck freighting. If you haven’t done billing and collecting in the industry, a factoring company can take that back office task over for you within the cost of factoring. When you have an insurance payment due, same day funding can keep you alive. Services like free credit checks on your customers is also a huge benefit. Factoring companies have large amounts of data on brokers/shippers/customers. When you get a load, a factoring company can determine that broker/shipper’s ability to pay. If you don’t have systems in place to credit check your customer, you are susceptible to higher risk. This can save you hours of time that may be better spent delivering loads or finding better paying freight.

On top of that, there are a staggering number of new trucking companies being formed every year, and it can be challenging for them to get financing the old-fashioned way (i.e., from a bank). Factoring, in many cases, is the only way they can get enough cash flow to run for more than a few months.

Factoring companies also have buying power. This means they can give you access to benefits for a better price than most small carriers, like fleet sized fuel discounts, maintenance and tire discounts, roadside assistance, dispatching services, load boards, and even business loans or cash advances.

Larger trucking companies can also do TMS integrations with their factoring company, which reduces their work load and helps save costs.

Factoring and Fraud Prevention

Another major issue in the logistics industry is fraud. Both from the broker and carrier perspective, there are several scams that are attempted by those trying to make a quick buck. False identities and illegal double-brokering are two of the most common, but new methods pop up every day.

Having a factoring company can help prevent fraud, or at the very least, limit your exposure. Factoring companies have to put in several processes to ensure they are not defrauded. Factoring companies don’t want their carriers to be victims of fraud, because it can cause shutdowns and stop expansion. Factoring companies only succeed when their carriers do.

Factoring companies have several tools to help them in this process, including ID verification, carrier and broker vetting tools, aggregator data sources and other technology that can help the carrier feel safer that customers the factoring company has approved are legit and they will be paid.

Many factoring companies also provide educational tips and recommendations for their carriers to follow in order to help them through their journey and keep from becoming victims.

As for some of those risks – it should go without saying that, as with any industry, there are good companies, better companies, and bad companies. Before you sign on the “dotted line” for a freight factoring service, it would be wise to run the numbers several times over. Make sure to ask questions about any parts of the agreement with which you are unsure, such as the factoring rates on a freight invoice. It is a safer bet to go with a factoring company that has been in business for 10+ years and has lots of established customers.

There are two types of factoring offered out in the logistics industry, recourse and non-recourse. However, the lines are blurred as to what you really get when you sign a non-recourse contract.

Recourse factoring is very straight forward: If your customer does not pay the bill to your factoring company for the money you were advanced, the factoring company will turn back to the carrier for those funds after a certain amount of time.

Non-recourse factoring sounds too good to be true, so you have to be very careful and read your contract. Some believe that it should be called “reduced recourse” in order to be truly transparent when it is sold. At the end of the day, factoring companies don’t give away money for free. They expect to get paid back for money they give out. Typically there are clauses in the contract that still allow a factor to recourse you, like if the load has a claim, if the customer declares a certain type of bankruptcy, or when it comes time to terminate your contract you are left with a huge bill. You will also have fewer customers that will be approved for you to factor, and you will likely be charged a higher rate for this type of contract. Always weigh the pros and cons, and fully understand all of the terms in the contract before you make a decision.

The chance that a customer might not pay is a risk that the factoring company has to take in order to make money. However, you can’t really blame them for doing their best to minimize that risk. This is called “reasonable assurance,” and it basically means that the factoring company has to have some sort of information indicating that your customer can and will pay when the time comes. The process usually includes credit checks and other information gathering (which, depending on the company, you may have to pay for). This is largely avoided by working with customers who are pre-approved by the factoring company. Many times, if the customer is not in the credit check system, you can request the factoring company to check them out to see if they can be trusted to pay.

Every factoring company has their own policies in place to minimize their risk or maximize their income. What makes them a good or bad company is how those policies affect your ability to make money. For instance, some companies may offer you lower rates than others, and it may sound too good to be true. Be careful because they could be charging other fees to make up the cost, like aging fees, per invoice fees, swipe fees, transaction fees and others.

Some companies may be able to charge a lower amount because they skimp on customer service or collections, while others lack the speed to pay you when you need it.

You usually get what you pay for when it comes to factoring, so always ask what you get for paying a higher rate. Some companies offer additional benefits like small business loans, dispatching services, fuel cards, fuel advances, emergency roadside assistance, tire discounts, insurance down payment assistance and truck/trailer financing.

Some even have extended hours and/or are open on weekends and holidays, while others are open just Monday through Friday from 8 a.m. to 5 p.m.

It just depends, but if you don’t read the fine print, it might cost you a lot of freedom.

Alternatives to Factoring

While there are many positives to factoring, there are also drawbacks. Factoring is a service that costs money. When you start a business, you should have a plan for how to fund it, and how to keep cash flowing. Many experts believe that you should have at least $25,000 in operating capital per truck after expenses, with $50,000 being the ideal amount, which allows you to wait out pay terms from your customers. Having your own cash flow is cheaper than using factoring.

Another option is to get a line of credit from a bank. This is usually a cheaper option than freight factoring, but it is also much more difficult to qualify for. Most banks will not fund a trucking operation unless it is a certain size, or if you have a certain amount of collateral. Asset based lending is also a cheaper option than factoring, but it requires a significant amount of assets to offset the operational costs that you have to cover.

The other reason carriers choose not to use factoring is because they don’t want to factor all of their invoices. Most factoring companies either have a minimum amount that must be factored per month, or they require that all invoices be factored. You also have to sign a contract to use factoring. The alternative here is to use quick pay with select brokers, but that comes with its own set of risks, like fewer customer options. You also lose all of the additional advantages of working with a factoring company, as mentioned earlier.