What is Freight Factoring? The Ultimate Guide

If you’re in the trucking business, chances are you’ve heard the term “freight factoring” thrown around. While freight factoring has become a popular way for owner-operators and trucking companies to avoid lengthy delays in payment on invoices. However, many drivers and business owners don’t understand precisely what it is, or how it works.

Freight factoring has the potential to financially benefit many stakeholders in the trucking industry by providing an influx of working capital into the company. This is especially true for owner-operators, who often spend as much time on their finances as they do on the road. Our ultimate guide to freight factoring provides an in-depth look and inside knowledge to help you make an educated decision when determining if a transportation factoring company is right for your business. From how the process works to common industry questions, we’ll provide the guidance you need to get started!

What is Freight Factoring?

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, 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.

How Does Freight Factoring Work?

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. This gives you the capital you need to keep your business moving forward. 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 literally dying to get paid.

What Does a Freight Factoring Company Do?

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 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.

The Application Process

While credit and invoice checks and the surrender of other personal / business information are far from enjoyable experiences, applications for many freight factoring companies usually only take a few minutes. Moreover, while getting the actual advance can vary, the average time is around 24 hours. At best, it can be as little as 1 hour, depending on your choice of factoring company. Some applications will allow the factoring company to immediately collect on your receivables, so always be careful when filling out an application to make sure it is not a binding contract.

How Do You Qualify?

In general, factoring companies dictate their programs based on risk and volume. The company will ask these questions to see how you will qualify:

1. Monthly Invoice Volume – Just like going to Costco or Sam’s Club, the more you factor the less you pay as a percentage.

2. Customer Base – Are you working with multiple freight brokers off load boards or just one customer? Having 100% concentration with one debtor can be risky.

3. Customers Days to Pay – There is a large difference between having $20K out for 25 days compared to 75 days. Essentially the factoring company could have purchased three times the amount of invoices with the customer who pays in 25 days.

4. How much of your invoice do you need to operate your business – Factoring companies can limit their risk by only advancing 85%-95% of the load when you deliver. This can help you get a lower rate.

Reviewing the Contract Terms

The factoring company will then make an offer. When assessing the offer, review the terms of the contract for these items:

1. How much can be borrowed? – Also known as max credit line or max factoring facility, it limits how much you can grow with a factoring company. A lot of factoring companies get larger loans from other banks, and they will limit a carrier’s growth so they can accelerate their credit line with their debtors in a steady fashion.

2. Percentage of invoice advanced the day you deliver – Are you getting all the money the day you deliver, or will you have a “reserve” account with the factoring company?

3. Aging of Invoices – When a factor does not advance the full amount there is a good likelihood that there will be aging fees in the contract. This will increase your cost with the factoring company. The longer your customer takes to pay, the more you pay in “aging fees.. You will also want to note the “clearance days” for checks. Your factoring company may have 7 days of clearance, which means 7 days after they receive the check they apply it to your account. For example, if your customer pays the factor in 38 days and they have 7 clearance days, that check will post to your account on day 45, possibly increasing your aging fee.

4. Other fees – What is the transaction fee or cost to send the money to the carrier? If you need to be paid the same day, what is that fee? Is there an invoice prep fee or invoice submission fee? Is there an administrative fee? Is there a default factor advance fee? Is there a setup fee, or lien search fee? Is there a termination fee or lien release fee?

5. Number of days to receive upfront advance after delivery – The majority of companies will have a cutoff of noon, and will send advances via ACH the next day. If the carrier misses the cut off time or “qualification time”, the deployed advances are delayed 24 hours.

6. How do I terminate from the contract? – The factoring company will have a contract length. In order to get out of the contract you will need to submit a termination notice in the proper amount of days prior to the contract end date. Next, the selling down of your open account receivables – any invoice the factoring company has paid you on, but has not received from your customer. If any of these are not met, you may be renewing your agreement with that factor for another term.

Freight factoring is not for every company and certainly not for every owner-operator. Determine whether or not factoring is right for your business in the next section

Freight Factoring Has been Around for Decades

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.

Companies Use Factoring for Different Reasons

Not every company or owner-operator uses factoring for the same reason. Some enjoy that factoring companies can help with some of the back-office support items they struggle with being a small business. Cash flow assistance is a significant benefit for almost all who participate, but some larger transportation companies are more concerned with overall growth. 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 a factoring fee on your invoice value. Some can even get you same day funding and services like free credit checks as long as you meet monthly minimums of volume, which is a huge benefit. This can save you hours of time that may be better spent delivering loads or finding better paying freight.

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.

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.

The point is, there’s no right or wrong way to use freight factoring, providing you have properly weighed the risks and benefits.

Every Factoring Company Has Pros and Cons

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.

Freight Factoring Has been Around for Decades

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.

What is the Difference between Recourse and Non-Recourse Factoring?

Some factoring companies claim to be non-recourse, meaning they will not collect from you if your customer does not pay the factoring company back. This boils down to small print as a tricky clause in the factoring contract. Non-recourse is only true in rare cases if the customer files for bankruptcy between the time you submit the invoice and when they are due to pay the factoring company. This happens very rarely. All factoring companies will recourse you if your customer simply does not pay or pays late, it is just a matter of when they will collect from you. Remember, factoring companies are not in the business of giving away free money. All factoring companies have language in the contract to make sure they can collect from you if your customers fail to pay in a timely fashion.

Customers Have Quality Too

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.

Always Read the Fine Print

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.

Whether you’ve come away from this guide excited about freight factoring or absolutely sure that it’s not for you or your business, we hope at least that it no longer seems confusing or intimidating. If you do plan to consider it, please be sure to weigh all the pros and cons first, and make sure it’s a good fit for the way you run your business.

Interested in hearing more about TAFS and how we can provide you with exceptional factoring services? Give us a call today! 913.393.6110