Freight Factoring is when your company’s accounts receivable are converted into cash by selling the freight bill of lading or outstanding invoices to a factoring company. Instead of waiting for 30, 60, or even 90 days for a load to be paid out a factoring company will get you that money now for a service fee.
While hauling freight is by no means an easy job, the principles of how one makes a living doing it are relatively simple: the customer has cargo to be delivered, you deliver it, and your payment minus your cost equals your profit.
However, this simplicity is marred by the fact that payments are almost never made immediately, with industry-standard being 40 days (or more) to fully process payouts to drivers and trucking companies. These process times can quite 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 overtime for the trucking companies.
With freight factoring, 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 next section.